Mastering Accounting in Construction: A Practical Guide for Efficient Financial Management

In the construction industry, where every project serves as a distinct financial entity with its own set of complexities, mastery over accounting in construction is vital. How do you adapt standard accounting principles to the fluctuating landscape of contracts, costs, and compliance unique to construction? This guide clears the path for you, focusing on pivotal areas like job costing, revenue recognition, and cash flow management, ensuring you’re equipped to keep your projects both compliant and profitable.

Key Takeaways

  • Construction accounting demands a customized approach due to the industry’s unique job costing, revenue recognition, and financial management challenges that arise from irregular long-term contracts and decentralized project locations.
  • Efficient construction financial management requires mastery of specific financial metrics and tools, such as construction accounting software, to track and analyze costs, manage cash flow, and adhere to accounting principles and tax regulations.
  • Strategic planning, from understanding different contract types to handling multi-state payroll complexities and adhering to financial ratios, is vital for risk mitigation, long-term success, and adapting to the cyclical nature of the construction industry.

Decoding Construction Accounting

Construction site with workers and equipment

Ever wondered why construction accounting feels like a different beast altogether? Well, it’s because construction companies operate very differently from standard businesses. They manage long-term, irregular, and flexible contracts, seasonal work, and unpredictable job availability. These unique aspects demand tailored methods and practices, such as cash, accrual, percentage of completion, and completed contract.

Each construction project operates like a short-term profit center because it requires unique inputs and has its own set of requirements. This individualized approach makes each project distinct and necessitates careful planning and management. It demands accurate job costing and allocation of expenses to ensure profitability. This means every dollar spent on a project must be tracked and assigned to that particular project. Sounds daunting? Don’t worry, we’ll guide you through it.

Mastering construction accounting hinges on comprehending these peculiarities and adopting fitting accounting methods. The right approach can drastically improve the financial management of construction projects, leading to more profitable operations. Without further ado, here are some essential financial metrics in construction finance:

  • Gross profit margin
  • Net profit margin
  • Return on investment (ROI)
  • Accounts receivable turnover
  • Accounts payable turnover
  • Cash flow
  • Overhead costs
  • Job costing

Understanding and tracking these metrics will help you make informed financial decisions and effectively manage your construction projects.

The Unique Landscape of Construction Finance

In most industries, production is centralized and repetitive. But in construction, each project is unique, presenting its own set of challenges and solutions. Moreover, construction projects are decentralized, taking place in different locations, impacting how accounting must be performed.

Construction projects often extend over long periods, sometimes spanning multiple accounting periods or years, which complicates financial management and prediction of job availability. Add to this the fluctuating direct and indirect costs, and estimating expenses for projects becomes a tricky affair.

The mobility of workers and equipment, which move from site to site, requires careful accounting for mobilization costs and adherence to varied local wage rates and regulations. Also, construction firms typically handle fewer sales compared to many other industries, leading to a distinct approach to financial management focused on project-specific cost variation and client relationships.

Key Financial Metrics for Construction Projects

Within the realm of construction, financial management lies in the minutiae. Job costing provides detailed tracking of costs and revenues for construction projects, facilitating more refined financial decision-making. Overhead costs, including:

  • administrative overhead
  • office expenses
  • insurance
  • training

all affect the financial health of projects.

Furthermore, utilizing historical financial data and generating precise labor cost estimates is key in circumventing revenue recognition problems and grasping the impact of labor costs and overhead costs.

Essentials of Revenue Recognition in Construction

Financial documents and calculator

In the realm of construction accounting, revenue recognition holds substantial importance. The methods used, such as cash-basis, completed contract, and percentage of completion, play a significant role in how a construction company’s financial health is perceived. A crucial guideline in this regard is the ASC 606, which requires contractors to recognize revenue when they transfer control over goods or services. But the long-term nature of construction contracts introduces challenges in revenue recognition, requiring mindful consideration of changes in project scope, contract terms, and completion timelines.

As an aid in this process, Revenue Recognition Software proves to be an invaluable resource. It supports construction companies in accurately recording revenue on a cash or accrual basis, ensuring performance monitoring of projects and proper billing.

Milestone-Based Completion Method

The milestone-based completion method, also known as the percentage of completion method, recognizes revenues and expenses based on the progress of the construction project. The percentage of completion for billing purposes can be calculated using various approaches, including the cost-to-cost method, efforts-expended method, and units-of-delivery method, which use cost, labor, materials, machine hours, or the number of units delivered to determine progress.

Adherence to FASB standards, IRS guidelines, and generally accepted accounting principles is indispensable for financial reporting, given the potential for discrepancies to significantly affect financial statements.

Post-Completion Revenue Strategy

Contrastingly, we have the Completed Contract Method (CCM). This revenue recognition approach recognizes revenue, expenses, and profit from a contract only after the contract is entirely completed. It’s particularly suitable for companies with short-term contracts, frequent uncertainties in project completion dates, or when avoiding cost estimation and inaccurate forecasts is desired.

However, while it defers reporting income and expenses, resulting in the deferral of tax liabilities, it also delays the recognition of expenses that could reduce taxable income.

Navigating Job Costs and Project Accounting

Cost estimation and project planning

In construction, job costing demands careful monitoring of costs related to a certain contract or project in order to evaluate profitability and determine precise pricing for upcoming jobs. To maintain financial control over construction projects, detailed record-keeping is crucial. It encompasses all direct, indirect, and overhead costs.

Retainage, typically amounting to 5-10% of the contract value, is held until project completion. Contractors must manage it skillfully to minimize its impact on profit margins. To record retainage more efficiently as liabilities or assets, accrual accounting is often employed.

Construction billing can be complex, offering several methods including:

  • Fixed price
  • Time and materials
  • Unit price
  • AIA progress billing

Each method carries its own accounting consequences. Utilizing job cost reports enables contractors to detect budget variances and pinpoint areas for cost control or reduction in ongoing or future construction projects.

Calculating Direct and Indirect Costs

Direct construction costs include expenses such as labor directly working on site and materials used, specific to each project. Indirect costs, on the other hand, are expenses that support the project, like the maintenance and fuel for vehicles and administrative overhead, but aren’t linked to any specific activity within the construction project.

While direct costs can be easily allocated to specific tasks within a construction project, indirect costs are spread across multiple projects or general project support, impacting the budget but not directly traceable to a single task.

Strategic Cost Allocation

Different cost allocation methods, such as:

  • Direct
  • Indirect
  • Step-down
  • Activity-based costing

can help manage construction project expenses and support informed financial decisions. The direct cost allocation method assigns expenses directly to specific construction tasks or items, providing clarity and precise cost tracking for each activity.

Indirect cost allocation involves determining all indirect costs and systematically distributing them over different project elements based on their proportional relationships.

Cash Flow Management Techniques

Cash flow management strategies

In the construction industry, cash reigns supreme! Proficient cash flow management is indispensable, necessitating precise tracking of costs and revenue, budgeting, and strategies to enhance cash inflows and regulate outflows.

Operating cash flow should be calculated by subtracting the amount paid for operating expenses from the payments received from customers. A cash flow analysis requires examining all activities on a cash flow statement to determine the funds available for expenses. In budgeting for a construction project, including a contingency for indirect costs can help manage unforeseen expenses.

Construction firms often encounter cash flow problems like delayed invoicing and slow-paying customers, which need effective management solutions. Improving cash flow can involve strategies such as using cash flow forecasts, negotiating terms with vendors, and managing retainage.

The Role of Cash Accounting

Cash accounting, also known as the cash method, recognizes revenue when payment is received and expenses when they are paid, and is often used by smaller construction companies due to its straightforward approach. While simple, it can limit proactive financial planning, as it does not allow for the recognition of income and expenses until cash transactions take place.

Using cash accounting, taxes are only paid on collected sales, and expenses are recorded at the time of payment, which can defer income taxes for a construction business.

Managing Inflows and Outflows

Construction contracts often include retainage, holding back a percentage of payment until project completion, necessitating strategic management of cash inflows. To improve cash inflows, strategies such as progress invoicing, offering early payment discounts, and accepting various payment methods can be employed.

Managing outflows can involve scheduling payments based on due dates and using credit lines or long-term financing for balancing cash requirements.

Leveraging Construction Accounting Software

Construction accounting software interface

In the current digital era, harnessing technology is essential for streamlined business operations. Specialized construction accounting software and financial automation tools significantly enhance the accuracy and efficiency of financial processes in construction accounting.

Construction companies can reduce administrative effort, simplify financial management, and increase profitability by leveraging construction accounting software. Investing in advanced construction technology, including accounting software, can lead to long-term efficiency gains, cost savings, and a competitive advantage.

Cloud-based construction accounting software offers the following advantages:

  • Simplifying and automating data entry
  • Providing real-time financial reports
  • Aiding in compliance with tax laws
  • Automated management of project invoices reduces delays and enhances real-time cash flow visibility.

Features of Good Construction Accounting Software

Good construction accounting software provides:

  • Real-time visibility into operations and financials
  • Job costing modules to track specific project expenses and revenues
  • Accurate financial reporting and cost allocation

Also, construction-specific accounting software reduces manual data entry errors, enhancing the accuracy of financial operations.

Integrating Software with Business Operations

Project management capabilities in construction accounting software facilitate:

  • Planning
  • Execution
  • Monitoring
  • Control

of all construction project aspects. Integrating project management tools with construction accounting software helps create detailed schedules and estimates, essential for managing a construction project from inception to completion.

Payroll Management in the Construction Industry

Payroll management in the construction sector is a convoluted task, given the multiple profit centers, decentralized production, and strict compliance needs, such as adhering to prevailing wage laws. Construction Payroll Software plays a pivotal role in automating payroll processes, ensuring compliance with tax withholdings and wage reporting requirements while also managing accurate deductions and benefits for the workforce.

Managing payroll across different job sites and states presents challenges such as multiple prevailing wage and union rates, varying tax withholdings, and the risk of double taxation and overpayment of unemployment taxes. Contractors must navigate union payroll reporting requirements and adhere to prevailing wage laws, which entails understanding union agreements and fulfilling various reporting obligations, including union reports and equal employment opportunity compliance.

Overcoming Multi-State Payroll Challenges

Income tax nexus, established through property ownership, employee presence, or income from contracts in a state, impacts a construction company’s ability to manage payroll across different states. Construction companies expanding into new states face challenges with payroll tax compliance due to varying state regulations and standards for establishing nexus.

Adapting to Union and Prevailing Wage Requirements

Prevailing wage rates are determined based on local wages and fringe benefits for similar construction jobs as identified by the Wage and Hour Division. Registered apprentices can be compensated at rates below the prevailing wage if they are enrolled in an apprenticeship program approved by the Department of Labor or a state agency.

Mitigating Risks with Accurate Financial Reporting

Precise financial tracking and reporting underpin strategic decision-making, proactive tax preparation, and risk mitigation in the realm of construction businesses. Accounting ratios that are indicators of a construction company’s overall financial stability include:

  • Current ratio
  • Quick ratio
  • Debt-to-equity ratio
  • Working capital turnover

Precise financial tracking supports strategic decision-making by providing accurate insights into a construction company’s performance and potential risks. Incorporating proactive tax planning in long-term financial strategies helps construction businesses minimize tax liabilities and capitalize on industry-specific deductions and credits.

Importance of Work-in-Progress Reports

Work-in-progress (WIP) reports are instrumental in project monitoring, offering current views on project advancement and assisting with resource allocation and strategic planning. Through regular financial evaluations using WIP reports, construction companies can manage risks proactively by detecting potential issues like budget excesses and project delays.

Ensuring Accuracy in Financial Statements

Maintaining detailed records and documentation for all transactions is crucial to support financial statements and provide evidence during disputes or audits.

Regularly reviewing financial reports and reconciling accounts with bank statements is vital for detecting discrepancies and contributing to the accuracy of financial records.

Avoiding Common Pitfalls in Construction Accounting

Embracing a uniform accounting strategy is crucial for construction firms to circumvent confusion and errors during tax filings. Construction companies operating in multiple states must navigate varying tax laws, requiring careful planning to avoid financial pitfalls.

Leasing vehicles and equipment brings specific accounting challenges that construction companies need to manage effectively. To avoid these pitfalls, it’s crucial to understand the nuances of construction accounting and implement effective strategies to navigate them.

Missteps in Job Costing

Choosing projects with profitable estimates is critical as underestimated costs can necessitate reallocating cash from profitable projects, causing potential financial strain. Inaccurate job cost estimates can arise from underestimation, failing to update estimates after change orders, and not incorporating all relevant costs.

Contractual Misunderstandings

Construction contracts such as:

  • Lump sum
  • Time and materials
  • Unit price
  • Guaranteed maximum price
  • Cost-plus

have implications for how businesses track costs and revenue. The choice of contract type in construction influences the accounting system and financial management, necessitating sophisticated cost tracking and profit prediction.

Long-Term Financial Strategies for Construction Firms

Periodic assessment and fine-tuning of business plans in alignment with market trends are fundamental to a construction firm’s enduring financial strategy. Aligning the company’s vision and mission with clear financial goals is critical for guiding long-term financial planning and strategic decision-making.

Succession planning is crucial for the continuity of a successful construction business and should be part of long-term financial planning to ensure smooth leadership transitions. Setting aside reserves during profitable periods is a prudent strategy to mitigate the impact of future downturns in the construction market.

Planning for Seasonality and Economic Fluctuations

The cyclical nature of the construction industry can lead to variations in job availability, thereby complicating the prediction of new project opportunities. During off-peak seasons, construction companies should re-evaluate pricing, seek favorable rates, and select profitable jobs that are under budget and on schedule.

Future-Proofing through Diversification

Diversifying revenue streams, which encompass diverse project types and services, is key to ensuring the longevity of a construction company. Construction firms can build a more resilient business plan by exploring opportunities across various project types such as private construction, public works, and service works.


In conclusion, mastering accounting in construction is not an easy feat. The unique aspects of the construction industry, such as project-based work, long-term contracts, and decentralized production, demand tailored accounting methods and practices. From revenue recognition to job costing and payroll management, each facet of construction accounting comes with its own set of challenges. But with the right strategies, tools, and understanding, you can successfully navigate these complexities to achieve financial efficiency and profitability in your construction business.

Frequently Asked Questions

How is accounting used in construction?

Accounting in construction is used to track revenue, expenses, and profitability for a construction business, aiming to improve cash flow and create accurate estimates and bids based on past project costs.

What is GAAP construction accounting?

GAAP construction accounting provides specific guidelines for contractors to follow when preparing their financial statements, ensuring consistency and accuracy in reporting. This helps in providing stakeholders with reliable financial information.

Is construction accounting difficult?

Yes, construction accounting can be difficult due to complex expenses, job costing, and unique overhead allocations, which can make understanding profitability and managing the business challenging. The fluctuating costs of building materials and labor add to the complexity.

How do you account for a project under construction?

To account for a project under construction, you should open a construction-work-in-progress account and categorize each project separately. Track all costs related to the construction, such as materials, labor, and transportation.

What is unique about construction accounting?

Construction accounting is unique because it requires tailored accounting methods and practices to accommodate project-based work, long-term contracts, and decentralized production.

Optimizing Your Practice: Top Strategies for Accounting for Veterinarians

Are you navigating the complex financial landscape of your veterinary practice and wondering how to enhance its profitability and stability? Effective accounting for veterinarians goes beyond basic bookkeeping; it encompasses specialized strategies tailored to the unique challenges of veterinary medicine. This article will guide you through critical financial management practices, including tax planning, cash flow, and leveraging specialized veterinary accounting services to set your practice up for success.

Key Takeaways

  • Veterinary accounting is unique and complex, requiring industry-specific knowledge to manage financial challenges like maintaining animal records, integrating specialized vendor systems, and allocating time and resources effectively.
  • Financial management for veterinary practices is more than just bookkeeping; it includes critical tasks like tracking expenses, managing cash flow, efficient budgeting, and strategic tax planning to optimize the practice’s financial health.
  • Leveraging technology in veterinary accounting, such as cloud-based systems and Veterinary Practice Management Software (VPMS), can streamline operations, enhance data security, and contribute to smarter business decision-making.

The Importance of Specialized Veterinary Accounting

Veterinary accounting services

Veterinary practices encounter unique financial challenges, requiring a distinct approach to accounting. From managing distinct working patterns to maintaining animal history records and specialized vendor integration, the financial management of a veterinary practice is no walk in the park. Understanding financial goals intimately and navigating the complex, unique aspects of veterinary accounting are necessary.

Outsourced specialized accounting can significantly benefit veterinarians by:

  • Reducing in-house costs and stress
  • Allowing more time and attention to be dedicated to veterinarian care
  • Providing valuable business advice
  • Offering industry-specific knowledge
  • Providing customized financial insights and strategies

Specialized veterinary accounting services pave the way for a secure, profitable future for practice owners.

Financial Management for Veterinary Practices

Financial management for veterinary practices

Managing finances in a veterinary practice goes beyond basic bookkeeping. It involves tracking expenses, managing cash flow, and classifying assets. Veterinary accountants play a key role in the financial health of a practice by managing asset classification, capital investments, and operational expenses.

They also provide valuable insights on the business side when deciding whether to own or lease office space and medical equipment, which should be based on the practice’s specific circumstances and growth projections.

Cash Flow Management

Cash flow is the lifeblood of any business, and veterinary practices are no exception. Effective cash flow management is pivotal for maintaining financial stability and facilitating day-to-day operations. This involves controlling recurring costs, speeding up payments, and ensuring the balance sheet is in order.

Strategizing is equally important as keeping the numbers straight in effective cash flow management. Here are some strategies to enhance cash flow:

  • Marketing services effectively
  • Monitoring accounts receivable
  • Utilizing automatic payments
  • Offering multiple payment options

In addition, regular meetings with financial advisors and the veterinary team, as well as engaging a CPA early on, are critical for managing cash flow, budgeting, and forecasting.

Budgeting for Success

For any veterinary practice, a sound budget serves as a roadmap to financial success. Utilizing a standard chart of accounts and incorporating historical income and expenditure data can establish a structured starting point for creating a veterinary practice budget.

Rather than being a static document, a budget should be proactively designed, factoring in the practice’s unique circumstances and objectives. It should encompass:

  • Projected revenue
  • Cost of goods sold (COGS)
  • Administration costs
  • Team expenses
  • Facilities costs

Consideration of seasonality and economic trends is necessary to enhance the accuracy of the budget, and it should be adjusted to account for known price increases, inflation, or shifts in the practice’s operations.

Tax Planning Strategies

For any veterinary practice, tax planning and tax compliance form critical aspects of financial management. Effective tax strategies can significantly impact the bottom line. For instance, reviewing entity selection, such as LLCs taxed as sole proprietorships or S corporations, can optimize tax outcomes depending on the practice’s size and revenue.

Identifying tax-saving strategies is a crucial role played by veterinary CPAs. Some tax-saving strategies for veterinary practices include:

  • Maximizing the Qualified Business Income Deduction (QBI)
  • Optimizing equipment purchase deductions
  • Deferring revenue
  • Accelerating expenses

CPAs can guide veterinary practices through a complex tax landscape and help them implement these strategies.

Veterinary Practice Performance Analysis

Veterinary practice performance analysis

Delivering quality care to patients is just one aspect of managing a veterinary practice. It requires an understanding of the financial health of the practice, and this is where veterinary CPAs come in. With services like financial planning, business analysis, and system enhancements, CPAs provide essential insights into profitability, cash flows, and budgets.

Assessing various aspects of a practice’s health and aligning with industry standards require key performance indicators (KPIs), industry benchmarks, and other metrics. Monthly financial tracking and real-time reports provided by CPAs and practice management software empower veterinarians to make informed financial decisions.

Key Services Offered by Veterinary CPAs

Key services offered by veterinary CPAs

Veterinary CPAs offer a range of services that go beyond just managing finances. They can:

  • Organize even the most disorganized financial records for bookkeeping purposes
  • Manage budgets
  • Accurately track expenses
  • Maintain organized payroll records

These services are instrumental in effectively managing the financial aspects of a veterinary practice, including veterinary hospitals and animal hospitals.

Payroll management is a key service of veterinary CPAs, ensuring accuracy in recording team wages and benefits, which forms a critical part of the financial health of a veterinary practice. Managing accounts payable is another significant service offered, which includes tax return purposes, bill paying, and financial statement services.

And with the use of encrypted software, veterinary CPAs prioritize the security and accuracy of financial reporting, ensuring up-to-date financial statements, essential for a stress-free tax season and safeguarding sensitive data.

Choosing the Right CPA for Your Veterinary Practice

Making a significant decision includes choosing the right CPA for your veterinary practice. It’s not just about finding someone who understands numbers, but someone who understands the unique financial landscape of the veterinary industry.

Verification of their expertise is crucial when selecting a CPA. Here are some questions to ask:

  • What percentage of your clients are in the veterinary field?
  • Are you familiar with the American Animal Hospital Association (AAHA) Chart of Accounts?
  • Are you involved in professional veterinary associations?

A competent veterinary CPA should offer the following services as a part of their CPA firm:

  • Business advice tailored to your practice
  • Tax planning and financial advising
  • Payroll processing
  • Bank account reconciliation
  • Bill payments
  • Developing business growth strategies

The Role of Technology in Veterinary Accounting

Technology in veterinary accounting

Like many other business sectors, veterinary accounting has also been revolutionized by technology. Cloud-based accounting systems eliminate the need for complex installations, hardware upgrades, and ongoing maintenance, reducing time and cost investments.

Beyond the cloud, practice management software (VPMS) improves efficiency and accuracy in accounting and record-keeping within veterinary practices. Practice managers can benefit from digital platforms such as Weave, which help automate the measurement of KPIs and monitoring of business metrics, providing insights for improvement.

From streamlining workflows and automating tasks to enhancing data security and regulation compliance, technology plays a pivotal role in the financial management of a veterinary practice.

Navigating Regulatory Changes and Industry Challenges

Regulatory changes and industry challenges inevitably impact the veterinary profession. From FDA guidance impacting the documentation and availability of compounded medications to anticipated workforce shortages, veterinary practices must navigate a constantly shifting landscape in the realm of veterinary medicine.

Veterinary CPAs have a crucial role in such a complex environment, including:

  • Helping maintain financial stability
  • Adapting to regulatory changes
  • Providing accurate and consistent financial reporting
  • Assisting practices in informed decision-making
  • Ensuring regulatory compliance amidst frequent changes

Employee Benefits and Financial Wellness

The success of a veterinary practice hinges on a positive practice culture and confident financial decision-making. Offering employee discounts can contribute to attracting and retaining employees, boosting morale, and increasing staff loyalty.

Financial wellness programs can also alleviate stress for veterinary teams by offering tools for day-to-day financial pressures and future planning. These programs often fill the gap left by insufficient financial education in veterinary schools and lead to a more positive practice culture.

Case Studies: Successful Veterinary Practices and Their Accounting Strategies

Exploring some real-life case studies can help in fully appreciating the impact of effective accounting strategies. One veterinary clinic, for instance, increased its profitability by switching to a cloud-based accounting system that improved financial data accessibility and accuracy.

Another veterinary practice experienced a significant turnaround by restructuring their debt and optimizing their tax strategy with the help of a specialized veterinary CPA. These case studies highlight the tangible benefits of implementing effective accounting strategies in veterinary practices.


In conclusion, veterinary accounting is a specialized field that requires an intimate understanding of the unique financial challenges faced by veterinarians. From managing cash flow and budgeting for success to navigating regulatory changes and leveraging technology, there’s a lot to consider. But with the right CPA and effective accounting strategies, veterinary practices can ensure a secure and profitable future.

Frequently Asked Questions

What is one of the largest expenses for veterinary practice?

One of the largest expenses for a veterinary practice is the staffing costs. It can be quite challenging for practice managers and owners to control these costs.

What is the average net profit for a veterinary practice?

The average net profit for a veterinary practice is estimated to be around 10% to 15% for small animal hospitals and 15% to 25% for emergency and specialty practices.

What is turnover for veterinarians?

The turnover rate for veterinarians varies depending on the position, ranging from 13% for managers to 25% for veterinary technicians. This means that a significant number of individuals in these roles are either leaving or starting a job at any given time.

What are the tangible assets for a veterinary practice?

The tangible assets for a veterinary practice include veterinary medical equipment, office furniture, and inventory. Goodwill is an essential intangible asset for a veterinary practice.

Why is specialized accounting important for veterinary practices?

Specialized accounting is important for veterinary practices because it offers tailored financial strategies and industry-specific knowledge to overcome unique financial challenges and ensure a secure and profitable future for practice owners.

Minimizing Tax Season Stress (6 Effective Tips That Work)

Minimizing Tax Season Stress

Arf! Arf! It’s me, Breyer, the office curator. This is the next installment of my Cook CPA blog, and I am still giving the best advice a dog can. 

I am so glad that we dogs rely on your humans to take care of us–we don’t have to worry about an annual tax filing. I am sorry to let you know that even though you provide great care for us, you can’t claim us as a dependent. 

What I can help you with, though, is by giving you some efficient tips on finding a way to minimize tax season stress. This blog will identify key steps you can take to make the process smoother, resulting in less stress for you.

Reducing Tax Season Stress By Reviewing Your Documents

Minimizing Tax Season Stress 6 Effective Tips That WorkThe most significant step you can take to make the process easier and alleviate tax season stress is reviewing your information and documents before handing these materials over to your CPA firm. 

This ensures that your CPA is able to accurately calculate your return on the first review. This will minimize any surprises since updated information may result in recalculating your return or what is owed. 

Another reason to review everything before handing the materials over is to avoid the kind of back-and-forth requests for information. 

These always remind me of a dog friend of mine who waits at the door to go out, two minutes later is waiting at the door to come in, and once in, is waiting at the door to go out again. By the time this exchange is over the dog and owner are frustrated. 

We suggest creating “financial mindfulness” which starts with having your documents organized as you move through the year, making sure that you are comfortable with the different technologies for retrieving and sharing those documents, and making a point to communicate questions early on. 

The Tax Organizer – A Tax Season Stress Reliever

Most CPA firms will ask you to complete a tax organizer; this is your opportunity to communicate about important tax events that happened during the year. The organizer will allow you to upload key documents. We recommend becoming familiar with technology so that you are comfortable sending and receiving documents.

Minimizing Tax Season Stress By Creating A Clear Communication Path 

Some other ways to minimize your tax season stress are about creating a clear path for communication. When you promptly respond to questions from your CPA firm, they can continue processing your return. 

Consider requesting an exit meeting to review tax returns since this can help you to understand a complex tax return and this meeting would give you an opportunity to clear up any question you may have. This type of meeting can also help you prepare for the next tax season, further minimizing stress. 

Eliminating Tax Season Stress (6 Powerful Tips) 

Eliminating Tax Season Stress 6 Powerful TipsWe dogs have a mental checklist as we prepare for our walks–leash (check), circle three times near the door (check), bark and nudge the door (check), and finally, get the owner on the end of the leash (check). Below is our 6-point checklist to help you work toward a more stress-free tax season: 

  • Save tax documents to a separate tax folder as they arrive
  • Schedule your tax appointment as early as possible to avoid last minute stress
  •  Use the tax organizer to make sure you have addressed everything. Don’t forget to completely fill out the organizer since doing so ensures you are ready for your appointment
  • Provide all documents such as W-2s, form 1099s, cost basis of securities sold, total of charitable donations, and a rental recap in excel to your CPA at the first meeting.  
  • Review all your documents before handing them over to your CPA firm. This ensures accuracy and avoids surprises as updated information may lead to recalculations. Plus, let’s avoid that “in-out-in-out” situation and organize everything beforehand, so you and your CPA don’t go barking mad.
  • Sign all documents such as the engagement letter and e-file authorization as timely as possible. Failing to sign these will create delays in filing which can lead to frustration for you
  • Be kind. It is a very busy time as deadlines change and there is an amazing amount of data for a CPA firm to process during this time. Kindness will create cooperation instead of adding more stress

So, let’s put those wagging tails to good use and make tax season less ruff!

Write Off These Home Improvements to Save Money This Tax Season

painting walls at home

painting walls at home

With economic uncertainty looming over many American households, you may be wondering if there are home improvement deductions you can take advantage of to save money this tax season. The answer is a resounding yes!

Several home improvement and repair projects are eligible for deductions and can save you money on your taxes. From energy-efficient upgrades and medical-related additions and modifications to home office-related expenses, there are several options for households looking to leverage tax-saving deductions.

This post outlines home improvement expenses you can write off this tax season to save money. Keep reading to determine if you are eligible for any of these tax-saving opportunities.

Energy-Efficient Renovations

Investing in energy-efficient products is one way to save money this tax season. As part of the recently enacted Inflation Reduction Act of 2022, energy efficiency tax credits for residential upgrades were extended through 2032. This is great news for homeowners looking to save money this tax season.

If you’re looking to lower your tax bill this year, you may consider taking advantage of several energy-efficient tax credits and rebates, including:

The Energy Efficient Home Improvement Credit

The Inflation Reduction Act reintroduced the Energy Efficient Home Improvement Credit with special credits for installing energy-efficient insulation, windows, doors, roofing, and other energy-saving renovations. For 2022, you may be eligible to receive a credit of 10% of the costs of installing energy-efficient products. This credit limit will be bumped to 30% for the 2023 tax year. Read this fact sheet for more information on new credit limits for qualifying improvements such as energy audits, exterior doors and windows, and water heaters or heat pumps.

The Residential Clean Energy Credit

The Inflation Reduction Act increased the credit amount to 30% for the costs of installing qualified systems using solar, geothermal, wind, or fuel cell power to produce necessary utilities like electricity and water heaters in your home. The 30% annual credit drops to 26% in 2033 and 22% in 2034, after which the credit will expire. Take advantage while you can!

High-Efficiency Electric Home Rebates

This program provides rebates to low- and middle-income households who upgrade their appliances and utilities to high-efficiency models. For example, your family may be eligible to receive a rebate of up to $840 if you purchase an energy-efficient stove, or up to $1,6000 if upgrading your home’s insulation.

If your total annual income is less than 150% of the median income where you live, you are eligible for this rebate and should leverage it to save money this tax season.

Medical-Related Improvements

a wheel chair in a plain background

If you, your spouse, or your dependent(s) require permanent home improvements as part of medical-related care, you can deduct certain related expenses from your tax bill. Taking care of yourself and your loved ones is a taxing process that often involves modifications to your daily routine.

Improvements to your home that are necessary for the medical care of you or your family are fully deductible, so long as they fit set criteria. The following are examples of medical care-related improvements that you want to deduct from your taxes to save money:

  • Adding entrance and exit ramps for wheelchair accessibility or ease of mobility
  • Expenses to widen hallways and interior and exterior doorways
  • Modifying kitchen cabinets and counters
  • Installing support bars and railings in bathrooms and around entrances and exits to your home
  • Adding lifting mechanisms to the exterior of your home or inside as a means to get from one floor to another
  • Modifying alarms, smoke detectors, or other electrical fixtures
  • Modifying certain landscaping features such as grading areas around your home

This is just a snapshot of the expenses that can be deducted to save you money on your tax bill. Check out IRS Publication 502 for a full list of medical-related home improvements that may be deductible.

You should note: any expenses that could be considered as increasing the value of your home – such as a swimming pool or other architectural designs – may not be deductible until, and if, you sell your home. It’s best to reach out to an expert CPA to discuss your unique situation.

Home-Office Improvements

The past few years have drastically changed the way many Americans work. While a large percentage of citizens conduct business operations from a home office, more and more business owners are adopting a home office base.

Several deductions exist for people who use their home as the principal business location and exclusively utilize space within their home to conduct their business operations. Unlike other deductions included in this post, home office-related repairs and improvements can be deducted from your taxes. The caveat here is that any repairs or improvements must only be in the part of your home you use exclusively to run your business.

While improvements are deductible through depreciation over a length of time, any repairs you’ve made this year can be deducted from your taxes on this year’s tax return. If you have an office or space in your home that qualifies for the home office deduction, you’ll be able to deduct the following expenses:

  • Repairs to windows and doors in the space
  • A percentage (relative to the ratio between your home and office footprint) of exterior maintenance and repair work, such as roofing, HVAC, and furnace repairs
  • A percentage of maintenance fees for pest control or extermination.

As you can see, the list of home office-related expenses is less robust than other categories in this post. However, if you use a room or space in your home exclusively for your business, there are still money-saving tax deductions you should take advantage of!

If you’re interested in writing off any home improvement deductions to save money this tax season, reach out to us. We bring together our friendly team and affordable services to make sure our clients never pay more than they have to.

How Having An LLC Can Help You Avoid Paying Too Much Tax

wooden blocks with llc written on it

wooden blocks with llc written on it

Choosing the right business entity for your company can have a huge impact on how you pay business income tax. Many businesses elect to set up their business with an LLC entity structure, opening up many tax-saving opportunities.

This post helps you understand the basics of paying taxes as an LLC entity, and the advantages of deductions and credits you can leverage to avoid paying too much in business income tax.

Taxes for LLC Explained

Before we get into the tax advantages of an LLC, it’s important that we lay the groundwork for how LLC taxes work. At the federal tax level, LLCs are considered pass-through entities. This means that LLCs (as well as sole proprietorships and S-corps) are not taxed on the entity level. Rather, any income generated by the LLC is passed to the business owners who then pay taxes on that business income on their personal income return. Although not all states levy a state-based LLC tax, you should check to see the unique tax regulations in your state before proceeding.

How an LLC actually pays those taxes is another matter. The ownership structure of the LLC plays an essential role in determining how LLC taxes are paid. There are three ways to establish an LLC structure:

  • Single-member LLC
  • Multi-member LLC
  • C-corporation or S-corporation classification

Each of these classifications pays income taxes differently. Let’s dive deeper into each one.

Paying Income Tax as a Single-Member LLC

As the sole owner of an LLC, you have a few tax advantages. First, the IRS deems single-member LLCs as disregarded entities. This means that as the sole owner of an LLC, you are not required to file a separate income tax return for your LLC income. Instead, you report your LLC income and expenses on your personal income tax return. This process is the same for business owners operating a sole proprietorship.

Depending on the state in which you live, there may be additional LLC-related fees if you make over a certain amount of income. For example, LLCs in California incur an annual LLC tax of $800 and an annual fee proportionate to your LLC’s annual income. Other states impose franchise taxes along with the annual LLC tax. You must know how your state taxes LLC entities before deciding to incorporate your own business.

Paying Income as a Multi-Member LLC

calculating business tax with coins in the front

Similar to the single-member LLC tax structure, multi-member LLCs are considered pass-through entities. Each member of the LLC pays taxes on the LLC’s business income on their personal tax return, relative to their ownership share of the LLC.

Additional state taxes also apply to this type of LLC entity structure, and you should ensure you’re prepared to file at both the federal and state levels, according to your state’s regulatory guidance.

Paying Income Taxes as a C-Corporation or S-Corporation LLC

Single-member LLC and multi-member LLC entities have a reasonably straightforward income tax return process. However, things can be more complicated if you choose to classify your business as a C-corporation or S-corporation.

Paying income tax as an S-corporation begins similarly to the other LLC entity types. In this tax status, you are still considered a pass-through entity. However, you must prepare and file a separate K-1 form for each of the corporation’s shareholders to demonstrate each person’s earnings and deductions. Then, you file an annual tax return on Form 1120S, which you can read more about here.

If you decide to file as a C-corporation, you will be subject to the federal flat corporate tax rate of 21%. On top of the federal tax, state and local corporate taxes may also apply. To file C-corporation taxes, read more about filing Form 1120 here.

As you can see, setting up an LLC doesn’t have to be a daunting endeavor. Carefully consider how each entity’s business tax requirements work with your projected business income, and ensure you’re accounting for any state and local taxes that may apply.

Tax Advantages of an LLC

Now that we’ve how an LLC entity structure impacts your business and tax filing process, this next section highlights several tax advantages you should leverage as an LLC.

Qualified Business Income Deduction

The qualified business income deduction (or QBI as it is more commonly known) is a major tax advantage for pass-through entities like the ones we outlined above. This tax deduction allows eligible LLCs, partnerships, sole proprietorships, and S-corporations, to deduct up to 20% of qualified net business income on their taxes.

This tax deduction became available to pass-through entities for the 2019 tax filing season. In 2022, there are new income thresholds you should be aware of before filing for the deduction:

  • Married Filing Jointly has an income threshold of $340,100
  • All other filing statuses have an income threshold of $170,050

While this deduction expires after 2025, you should contact us to ensure taking advantage of this deduction is the right tax-saving move for your LLC.

Increased Contribution Limits

steps made of wooden blocks

Another tax advantage of setting up your business as an LLC is the increased contribution limits for your retirement accounts and life insurance policies. In the case of a retirement account, a single-member LLC can contribute up to 20% of net compensation. Multi-member LLCs may contribute up to 25% of net compensation.

Rules regarding SEP IRA depend on your particular entity structure, so it’s essential to speak with an experienced accountant to ensure you are following the appropriate tax laws. Set up a free consultation with us here.

While life insurance is not considered a business expense by the IRS, the federal agency does allow you to take advantage of tax-saving deductions in some cases. If you are an LLC, S-corp, partnership, or sole proprietorship, you may be able to deduct the life insurance premiums for you and any employees your business employs.

Other Tax Advantages of an LLC

There is a long list of business-related expenses you can deduct as an LLC business entity. Many of them may already be familiar to you, including business costs, office supplies, business taxes, utilities, and rent.

However, there are other deductions you should consider to help you avoid paying too much in business taxes as an LLC. These deductions include:

If you’re interested in other, lesser-known tax write-offs for your LLC, check out our recent article here. And if you need more information about filing for an LLC entity status, reach out to our expert CPA team to schedule a free consultation. We can help you navigate the filing process with the state and ensure you’re ready to file the appropriate tax forms for your entity.

Meta Description: Several home improvement and repair expenses are eligible for deductions and can save you money on your tax bill. From energy-efficient upgrades and medical-related additions and modifications to home office-related expenses, there are several options for households looking to leverage tax-saving home improvement deductions. This post outlines the home improvements you can write off this tax season to save money.

4 Reasons Why Outsourcing a CFO Saves You Money In Business

handshaking with an outsource cfo

handshaking with an outsource cfo

Outsourcing the CFO role can be a huge money saver for your business. The CFO is one of the most critical roles you can hire to ensure the financial success of your business, yet hiring the right person can be daunting.

There are several benefits to outsourcing your CFO, many of which can help your business save money. In this post, we’re outlining the four major ways outsourcing CFO services is a better financial move for your business than hiring an in-house employee.

From making cost-cutting decisions to streamlining your tax filing process, outsourcing CFO responsibilities gives your business the flexibility it needs to keep thriving.

Let’s dive into the four ways outsourcing CFO services can help your business save money this year.

Take the Bias Out of Cost-Cutting Practices

CFOs play a crucial part in the success of your business. One of the main functions of their role is to ensure your business can sustain its current business structure. Tasks like administrative management, risk assessment, and business goal planning are high on the list of a CFO’s responsibilities.

Traditionally seen as the right-hand of the CEO, a CFO must have their eyes on every big move your business makes. Making cost-cutting decisions is among the most challenging tasks a CFO will face. CFOs are often tasked with examining bloated overhead and making difficult firing decisions. While deciding to cut jobs and fire large swaths of employees is not easy for any executive, the fact is having an unbiased party making the difficult call is much easier for all involved.

An outsourced CFO helps your business identify areas, like payroll, where you can make cost-cutting moves to save money. By removing the emotional aspect of such decisions, you can feel confident to make those tough business moves with sound financial justification.

Remain Focused on Financial Goals

a black binocular sitting on top of a bag

Both in-house CFOs and outsourced CFOs wear many hats. However, a critical difference between hiring an outsourced CFO is that they are not bogged down by your business’s daily operations like an in-house CFO may be. In-house CFOs can quickly become time-strapped with team meetings, team management, and unnecessary paperwork. Instead of focusing on money-saving functions like closing financial gaps and managing cash flow, in-house CFOs can be distracted by other business-related functions. In fact, a recent report by Datarails indicates that CFOs spend around 10 hours per week on manual work rather than on strategic financial analysis.

Hiring an outsourced CFO means your budget, cash flow management, risk assessment, and financial reporting are all done off-site by a professional whose only job is to ensure your finances are running smoothly. Your business’s cash flow is the most critical part of staying financially solvent. It’s essential that the person you hire as your CFO has the time and mental energy to complete a routine in-depth analysis of your finances. These reports are critical in setting and achieving your business’s financial goals and saving you money.

Aid in Fundraising Campaigns

A chief function of any CFO is raising capital for the business. Fundraising can be necessary to ensure your business can keep up with cash flow needs. But ensuring your CFO has the right connections and knows how to navigate the choppy waters of fundraising campaigns can be daunting.

Luckily, this is where an outsourced CFO can help your business generate more money. Because outsourced CFOs are generally well-connected with other financial service professionals, they can cast a wider fundraising net than an in-house professional.

Leveraging their own entrepreneurial chops means getting connected with the right financing institutions and leaders much more quickly than asking an in-house CFO to start making the networking rounds. Most outsourced CFOs have a large network of financial professionals they can tap to help your business raise the capital needed to achieve your next big goal. Most importantly, while an outsourced CFO can save you money, it’s equally critical they know how to make you money.

Streamline Your Bookkeeping & Tax Filing Process

clock calculator and a pen side by side

While some CFOs identify as accountants, it is certainly not required to step into this executive role. This means that many businesses must hire both an in-house CFO and a separate CPA to help with tax filings.

Therefore, hiring a CPA who offers outsourced CFO services can help your business save money in the long run. Instead of onboarding a new in-house CFO – paying all the upfront costs associated with headhunting and salary negotiations – and paying a separate accountant to help with bookkeeping and tax filings, you can streamline the process by outsourcing your CFO functions.

Hiring an outsourced CFO who doubles as a trusted CPA is one of the best ways to save your business money.

Cook CPA Group’s outsourced CFO service gives you the best of both worlds. We provide expert CPA services alongside strategic CFO services with the intent to save your business money year after year. When you’re ready to explore what Cook CPA Group can offer, we encourage you to check out our outsourced CFO services package and book a free consultation call with Evelyn to get started today!

Meta Description: Choosing the right business entity for your company can have a huge impact on how you pay business income tax. Many businesses elect to set up their business with an LLC entity structure, opening up many tax-saving opportunities. Read this post to familiarize yourself with the basics of paying taxes as an LLC entity, and the advantages of deductions and credits you can leverage to avoid paying too much in business income tax.

The Right Way to File Your Business and Personal Taxes

woman planning budget for her business and working on taxes

woman planning budget for her business and working on taxes

Filing your business and personal taxes can be daunting, but it’s an important part of being a responsible business owner and citizen. By following the right steps and keeping organized records, you can ensure you’re paying the correct amount of taxes and avoid any potential penalties or issues with the IRS.

By ensuring you take the right steps in filing your taxes, you can count on the smooth operation of your business and compliance with IRS rules. This post guides you through some key steps to follow when filing your business and personal taxes.

Learn the process and best practices you can use to make the tax filing process as smooth and stress-free as possible.

Determine Your Tax Filing Status

One of the most important things you can do to file your business and personal taxes the right way is to determine your tax filing status. Your tax filing status will determine the tax rate and deductions you’re eligible for.

The five main tax filing statuses are:

  1. Single
  2. Married filing jointly
  3. Married filing separately
  4. Head of household
  5. Qualifying widow(er) with dependent child

Depending on the type of business you have and your location, you may be required to pay federal, state, and local taxes. Some common taxes that businesses may be required to pay include:

  • Income tax: This is a tax on the profits your business generates. Your income tax rate will depend on the size of your business and the tax bracket you fall into.
  • Sales tax: If your business sells goods and services, you may be required to collect and remit sales tax to the government. Your sales tax rate will depend on the location of your business and the type of goods or services you sell.
  • Payroll tax: If you have employees, you may be required to pay payroll taxes, which include Social Security, Medicare, and unemployment insurance taxes.
  • Property tax: If you own a business property, you may be required to pay property taxes to the local government.

In addition to these business taxes, you may also be required to pay personal taxes on any income you receive, including your salary or profits from your business.

Establish Diligent Record Keeping

looking for files in the folder

In order to file your taxes accurately, you’ll need to gather all necessary documents and information. Having necessary documents on hand means you have to keep on track with meticulous record keeping throughout the year.

Good recordkeeping includes keeping track of all income and expenses, as well as any deduction you are eligible for. Keeping good records makes it easier to file your taxes and will also help you claim all the deductions and credits you are entitled to.

If you aren’t diligent about record keeping, challenge yourself to keep the following documents organized next year:

  • W-2 form (if you’re an employee)
  • 1099 forms (if you’re an independent contractor)
  • Receipts for business expenses
  • Other important financial documents

Determine Your Business Structure

Your business structure will determine how you file your business taxes. If you’re a sole proprietor or single-member LLC, you’ll report your business income and expenses on your personal tax return.

On the other hand, if you have a partnership or multi-member LLC, you’ll need to file a separate business tax return (Form 1065) and issue K-1 forms to each of your partners.

If you have a corporation, you will need to file a corporate tax return through Form 1120 or Form 1120-S.

For more detailed information about filing business taxes, read our article here.

Choose the Right Tax Forms

wooden box with cross and check marks

There are many different tax forms you may need to file, depending on your business structure and the type of income you receive.

Some common forms for small businesses include:

  • Form 1040 – This is the main personal tax form most taxpayers use to report their income and claim deductions.
  • Schedule C (Form 1040) – This form is used by sole proprietors and single-member LLCs to report business income and expenses.
  • Schedule E (Form 1040) – This form is used to report income or loss from rental properties, partnerships, and S corporations.
  • Form 1120 or Form 1120-S – Corporations use these forms to report their income and expenses.
  • Form 1065 – This form is used by partnerships and multi-member LLCs to report their income and expenses.

Claim Deductions and Credits

As a business owner, you may be eligible for certain deductions and credits that can reduce your tax liability. Some common deductions include business expenses such as office supplies, travel and transportation costs, and employee benefits.

You may also be eligible for credits for things like hiring employees from certain disadvantaged groups or investing in renewable energy.

Click here for a list of lesser-known tax deductions.

File Your Taxes On Time

The deadline for filing your business and personal taxes is typically April 15th of each year. If you’re unable to file by the deadline, you can request an extension using Form 4868.

However, keep in mind that an extension only gives you more time to file your taxes – it does not give you more time to pay any taxes that you owe.

Pay Any Taxes Owed

If you owe any taxes, you’ll need to pay them by the deadline to avoid late fees and penalties. You can pay your taxes online, by mail, or in person at a local IRS office. By following these steps and working with Cook CPA Group, you can ensure that you’re filing your business and personal taxes correctly and avoiding any potential issues with the IRS.

Frequently Asked Questions About Filing Business Taxes For the First Time

business owner filing their first business tax

business owner filing their first business tax

Starting a business is an exciting time in any entrepreneur’s life. However, the elation you may feel in seeing your vision come to life can quickly dissipate once tax season comes around. Filing business taxes for the first time can be a daunting experience.

In my over 20 years of experience as a professional accountant, I have found that business owners ask the same accounting and tax questions when first getting started. In an effort to help our clients, my team has put together this guide answering the most frequently asked questions about filing business taxes for the first time, including:

  1. How much does my business have to make before I’m required to pay taxes?
  2. How much should I put away to pay my business taxes?
  3. Will my business get a tax refund?
  4. Do I have to file taxes for my business if it made no money this year?

How much does a business have to make before paying taxes?

This is one of the first questions new business owners have about filing business taxes for the first time. Fortunately, the answer is straightforward. According to IRS tax laws, you must pay the Self-Employment tax (SE tax) if you work for yourself. This tax funds social security and Medicare, providing you with retirement, disability, and hospital insurance benefits.

If you own your own business, you are required to pay the SE tax if one of the following applies:

  1. Your net earnings from the business were $400 or more.
  2. You work for a church or a qualified church-controlled organization that elects to be exempt from social security and Medicare taxes. In this case, you must pay SE tax if you receive $108.28 or more in wages.

If either of the above points applies to you, you should also confirm you do not fall under any special rule or exception. Generally, the IRS allows exemptions to this rule for public officials like notary public fees, state and local government employees, etc.

For more information on the Self-Employment Tax, visit the IRS website here.

How much should a business put away for taxes?

magnifying glass one hundred dollar bills and percentage sign

How much you pay in tax in your first year in business (and every year after) depends on your business entity type and where you live. If you live in any of the following states, you don’t have to worry about saving money to pay state income tax:

  • Alaska
  • Florida
  • Indiana
  • Montana
  • Nevada
  • New Hampshire
  • South Dakota
  • Wyoming

On the other hand, if you live in a state with a high-income tax rate, like California or New York, you want to consider putting away a few extra dollars to pay your state income tax.

Another consideration is your business entity structure. If you structured your business as an LLC, S corp, or sole proprietorship, expect to pay the same tax rate as your own personal income tax rate. If you have a C corporation, you will pay a flat rate of 21% in taxes.

To account for the differences in business structure and state-based income tax variations, we recommend saving around 30% of your business income after expenses and deductions. That should be plenty of savings to pay both federal taxes and any applicable state taxes.

Do I have to file taxes during my first year in business?

The short answer to this question is yes. If your business made more than $400 in income this year, you are required to pay taxes your first year in business. The main thing to consider when filing taxes in your first year in business is the business tax payment deadlines.

If you expect to owe more than $1,000 or more in tax, and you operate your business as a sole proprietor, partner, or S corporation shareholder, expect to make quarterly estimated payments rather than the annual payments made as a personal filer. If your business is a C corporation and you anticipate owing tax of $500 or more, you must also make quarterly estimated tax payments.

Check out the IRS guide on Estimated Taxes to learn more about their requirements.

Do businesses get a tax refund?

judge gavel calculator and gold scale on dark background

Many business owners wonder if they can expect to see a tax refund in their mailbox after filing their taxes. While not as common for businesses as for personal tax filers, your small business can receive a tax refund in a few cases.

Since most business tax entities are considered pass-through, the business owner pays their federal income taxes on their individual tax return. So, if you own an LLC, sole proprietorship, or S corp, and your tax payments exceed the tax due, you can expect a tax refund just as you would with a personal tax return.

A benefit of structuring your business as a C corporation is the expectation of receiving a business tax refund. Because C corporations pay income taxes directly as a business (instead of passing through to the owner(s) personal return), they are the only entities that receive a refund to the business itself. Corporations can expect to receive a tax return only if it has paid more in estimated taxes than the tax it owes.

Do I have to file taxes if my business made no money this year?

There are several instances where a business has formed under a business entity (LLC, sole proprietorship, S corp, or C corp) but has not generated any income for the year. Whether you set up your business entity before formally opening or have ceased business operations for the year, you may still be required to file taxes even if you made no money.

Here are the specific rules for each business entity structure:

  • Single-Member LLC – there is no need to file taxes if you have no income or qualifying expenses.
  • Multi-Member LLC (partnership) – there is no need to file taxes if you have no income or qualifying expenses.
  • Sole Proprietorship – there is no need to file taxes if you have no income or qualifying expenses.
  • C Corporation – you must file an income tax return on annual taxable income unless you are exempt under section 501.
  • S Corporation – you must file an income tax return on annual taxable income unless you are exempt under Section 501.

Still, have questions about filing taxes in your first year in business? Schedule a free consultation today to speak with an expert team member. Cook CPA Group offers an array of tax preparation and planning services to help you through the business tax filing process.

4 Question You Must Ask Yourself Before Doing Own Business Accounting

woman thinking about doing her own business accounting

woman thinking about doing her own business accounting

Ensuring your business operations run smoothly is an overwhelming responsibility as a business owner. While some processes can come more easily to you than others, accounting practices are often weak points in many businesses.

You may think doing your own business accounting will save you much-needed cash flow, but if you don’t have a clear understanding of accounting practices, you could waste precious time and energy doing your own accounting.

Business accounting is one of the most important aspects of running a successful business. Before deciding to do your own business accounting, you should ask yourself the following four questions. These questions may help shape your perspective on some more technical aspects of business accounting.

In the end, you may find hiring an expert CPA saves you time, money, and energy.

How many monthly transactions do you expect?

An essential question to ask yourself before doing your own business accounting is how many transactions you expect to make each month. Keeping track of monthly transactions may be easy if you’re in the early stages of establishing your business. However, as your business grows, it becomes more important to ensure you track every transaction accurately.

There are many options to consider in the world of accounting software, with QuickBooks being a common choice among small business owners. Before you begin researching all your accounting software options, keep the following considerations in mind:

  • Accounting software typically comes with a monthly or annual cost. Run the numbers to determine whether it may be more cost-effective to work with a CPA instead.
  • Setting up your accounting software profile takes time. Consider the amount of free time you have to set up your account and learn the ins and outs of an accounting software program.
  • Accounting software can have many features that go unused by your business. While offering shiny bells and whistles is a great way to attract new buyers, the truth is you may be paying for features you don’t need.

Can someone else validate your calculations?

businessman asking help to an outsource cfo about his business accounting

Ensuring your financials are accurate is vital to the health of your business. Before deciding to do your own business accounting, ask yourself whether you feel confident making all the calculations yourself.

While accounting software can help you, it’s critical to manually review your calculations before filing your taxes. Many Cook CPA Group clients use their own accounting software but send us their account reports to ensure everything is up to snuff before filing their taxes.

Everyone makes mistakes, and it’s essential to recognize that business accounting is complex. Having a second pair of eyes to validate your calculations and confirm your accounts are in order is a huge step in ensuring you file your taxes accurately and timely. Doing your own business accounting may not be a wise decision for you if you don’t have someone you trust to double-check your financials.

Do you have separate business and personal accounts?

Maintaining separate business and personal accounts can go a long way in ensuring your accounting process is seamless. And, if your goal is to make paying taxes as easy as possible, separating your business accounting function from your personal accounts is critical.

Before deciding to do your own business accounting, review your current process. If you currently mix your business accounting with your personal accounting, it may be wise to separate them. While an experienced CPA has the know-how to wade through mountains of transactions, the process may prove too time-consuming for you.

Opening a separate business account is the best piece of advice I can give any business owner interested in doing their own business accounting. Doing so can save you unnecessary headaches during tax season.

Are you familiar with business-related tax deductions?

businessman computing business related tax deduction

One of the main arguments against doing your own business accounting is missing out on business-related tax deductions. With the potential to save hundreds if not thousands of dollars on your tax bill with business-related deductions, you must know the opportunities you can take to pay less in taxes.

Business deductions are an important component of any tax filing, and accurate accounting plays a major role in claiming the appropriate tax savings. No matter the size or years in business, every business can and should leverage deductions. But researching eligibility requirements and ensuring you can legally claim the deduction can become a complex process.

Many people who opt to do their own business accounting also prefer to file their own taxes. While this can streamline the tax filing process, you could potentially be leaving money on the table. We strongly recommend you consult with a trusted CPA for guidance.

Cook CPA Group has decades of business accounting experience. We encourage you to schedule a free consultation with us if you’re debating whether to do your own business accounting. We can guide you through the important steps you should consider and serve as a resource for any business accounting questions you may have.

5 Child and Dependent Expenses You Can Deduct From Your Taxes This Year

couple with their children consulting lawyer about tax deduction

couple with their children consulting lawyer about tax deduction

The rising cost of living is a significant burden for many U.S. families. While you can’t deduct grocery bills or utilities from your tax bill, other family-related expenses can reduce your overall tax bill this year. From child care and adoption fees to education-related expenses, there are several tax credits you should leverage.

This post outlines the five child and dependent expenses that may just earn you a deduction this tax season, including:

  • The Child Tax Credit
  • The Child and Dependent Care Tax Credit
  • The Adoption Tax Credit
  • The American Opportunity Tax Credit
  • The Lifetime Learning Tax Credit

Keep reading to see if you qualify for any or all of the five tax credits.

Child Tax Credit

You may have heard the buzz around the Child Tax Credit (CTC) in recent years. First introduced in 1997 by President Clinton, the Child Tax Credit is a fully refundable tax credit for children under 17. In 2021, the Biden-Harris Administration expanded the Child Tax Credit to $3,600 per child under the age of 6 and $3,000 for other qualifying children under 18.

However, that expansion ended in 2022, and the credit will return to the original $2,000 per qualifying child under the age of 18.

How to Qualify for the Child Tax Credit

There are two factors to qualify for the Child Tax Credit: qualifications for you as the filer and qualifications for the child or dependant.

To qualify for the full CTC for each child, you must ensure you have a qualifying child and that the child has a valid Social Security number. Additionally, your annual income cannot be more than:

  • $150,000 for married filing jointly, or if you are filing as a qualifying widower
  • $112,500 for head of household filers
  • $75,000 for single filers or married filing separately

Your child or dependent must meet the following criteria to be eligible to file for the CTC on your tax filing:

  • Be under 18 at the end of the year
  • Be your child, stepchild, eligible foster child, sibling, stepsibling, half-sibling, or descendant (e.g., grandchild, niece, or nephew)
  • Provide no more than 50% of their own financial support during the tax year
  • Live with you for more than half the year
  • Be claimed as a dependant on your return
  • Not file a joint return with a spouse
  • Be a U.S. citizen, national, or resident alien

If you and your child or dependent meet the eligibility criteria, you can claim the Child Tax Credit on your tax return by filling out Form 1040 and submitting your Individual Income Tax Return with Schedule 8812 attached.

Child and Dependent Care Tax Credit

single mother working on her application for tax deduction

Another potential money saver for your family is the Child and Dependent Care Tax Credit. This credit provides cost savings for families who paid for care for their child or dependent. Child care can include care provided at a center, daycare facility, camps, or relative. At this time, state-based care does not qualify for the credit.

How to Qualify for the Child and Dependent Care Tax Credit

To qualify for this cost-saving credit, you:

  • Paid for care for a qualifying child or dependent under the age of 13
  • Paid for care for a qualifying child or dependent to look for employment
  • Paid less for care than your total yearly income

If you meet the eligibility criteria, you can claim the Child and Dependent Care Tax Credit on your tax return by filling out Form 2441 with your Individual Income Tax Return.

Adoption Tax Credit

happy family after the approval of the adoption

If you adopted a child or are in the process of adopting a child, you may qualify for the Adoption Tax Credit. It’s well-known the adoption process is lengthy and expensive. Luckily, the Adoption Tax Credit can help you save up to $14,440 per eligible child. Though there are some income limits and other eligibility factors, it may be worth your time and effort to consider filing for this tax credit.

How to Qualify for the Adoption Tax Credit

To qualify for the Adoption Tax Credit, the child you are adopting must be under the age of 18 or, if over the age of 18, must be unable to care for themselves. Additionally, the adoption credit is based on your modified adjusted gross income (MAGI), and you should check the IRS website or reach out to us to confirm the MAGI amount for 2022.

Qualified expenses include adoption fees, legal fees, adoption-related travel expenses, and other directly related expenses. To research other related expenses such as home study or same-sex parent adoption credits, read this article published by the IRS.

If you meet the eligibility criteria, you can claim the Adoption Tax Credit on your tax return by filling out Form 8839 with your Individual Income Tax Return.

American Opportunity Credit

mother and her college student daughter doing application for aoc

If your child or dependent is a student at an eligible higher education institution, you may be eligible for an annual credit of $2,500 per student through the American Opportunity Tax Credit (AOTC).

AOTC provides tax credits for qualified education expenses paid for during the first four years of higher education, including tuition, fees, books, supplies, equipment, and other related student expenses.

How to Qualify for the American Opportunity Tax Credit

Similar to the Child Tax Credit, there are two categories of eligibility: one to determine student eligibility and the other to determine if you can claim the credit on your tax return.

To be eligible for AOTC, a student must:

  • Earning a degree or education credential
  • Be enrolled at least part-time for at least one academic period beginning in the current tax year
  • Not have claimed the credit for more than four tax years
  • Not have a felony drug conviction

To claim AOTC on your return, you must have a MAGI of $80,000 or less or $160,000 for married couples filing jointly. You may be eligible for partial credit if your MAGI is over $80,000 but less than $90,000 or over $160,000 but under $180,000 for married filing jointly.

If you meet the eligibility criteria, you can claim the American Opportunity Tax Credit on your tax return by filling out Form 8863 with your Individual Income Tax Return.

Lifetime Learning Tax Credit

graduating student doing documents for llc

In addition to the ATOC education tax credit, you may be eligible to save up to $2,000 on your tax bill by claiming the Lifetime Learning Credit (LLC). The LLC covers qualified tuition and related expenses. Unlike the AOTC, the LLC helps students pay for undergraduate, graduate, and professional degree courses and other related expenses.

Although the AOTC provides a slightly higher return, there is no limit on the number of years you can claim the tax return. To claim the LLC on your tax return this year you, your dependent, or a third party must have paid for qualified education expenses for higher education and paid the education expenses for an eligible student enrolled at an eligible education institution. Additionally, the eligible student must be yourself, your spouse, or the dependent listed on your tax return.

How to Qualify for the Lifetime Learning Tax Credit

To be considered an eligible student and claim the LLC, the student must be enrolled or taking courses for at least one academic period at an eligible education institution to get a degree or credential or improve job skills.

If you meet the eligibility criteria, you can claim the Lifetime Learning Tax Credit on your tax return by filling out Form 8863 with your Individual Income Tax Return.

There are many ways to save money on your tax return, especially if you have a child or dependent. While these five tax credits are a good place to start, the best way to get the lowest tax bill is by reaching out to a professional accountant to walk you through tailored solutions.

Schedule a free consultation with Cook CPA Group today to leverage these tax credits on this year’s tax return. Our team of expert and approachable accountants make sure you don’t pay more than you have to.