A few words of caution regarding entertainment expenses

It’s…The Holidays!  Many people – including business owners – entertain around the holidays.  They throw big parties at home.  They host big dinners in restaurants.  The difference between “people” and “business owners” is that business owners try to take a tax deduction for these entertaining expenses.  The IRS knows this, and has developed a pretty cut-and-dried response.

Essentially, if your guest list includes other business people, your entertainment expenses may be deductible on a pro rata basis.  In English, this means you need to add up the total expenses for the party, divide by the total number of guests in attendance, and then multiply by the number of business people in attendance.

When start-up expenses don’t count

You know the perfect new business. It’s right up your alley. You spend nearly a thousand dollars on a fancy lawyer who registers your name, gets you a federal ID, and establishes you in Delaware (for tax purposes, of course!) as well as your home state. You even spring for a p.o. box and slick business cards. Maybe even buy a slim new top-of-the-line laptop.

But then life gets in the way. You meant to run ads. You wanted to hire a salesman. You were going to order inventory. Heck, you were going to make Real Money so you could quit the day job. But after three or four years…nothing.

Consider this. Let’s say I dig a foundation intending to build a house, but I never do anything beyond arranging for the delivery of several dozen pallets of block. Or I buy a dress pattern and cloth intending to make a dress, but after I lay it out on the table, I never even cut the cloth. Or I take books out of the library but don’t open them. Or I register for classes but never show up.

In honor of Veterans Day 2015, I am sharing an article written by Father Dennis Edward O’Brien, USMC.  It is reprinted in its entirety.  And I say thank you.

What is a Veteran?

By Father Dennis Edward O’Brien, USMC

Some veterans bear visible signs of their service: a missing limb, a jagged scar, a certain look in the eye. Others may carry the evidence inside them: a pin holding a bone together, a piece of shrapnel in the leg or perhaps another sort of inner steel: the soul’s ally forged in the refinery of adversity.

Except in parades, however, the men and women who have kept America safe wear no badge or emblem. You can’t tell a vet just by looking.

How to head off under-withholding penalties

Let’s say you run a business, and take a small salary.  And let’s say you had a great year!  If your business is an LLC or S Corp, or even a sole proprietorship, that great year is going to find its way to your personal 1040, and you’re going to have to pay tax on it.

But you’re already contributing with withholding from your small salary, right?  Isn’t that good enough?  Well, if it’s been enough in prior years, and this year is especially good, then probably not.  And not only will you owe income tax and self-employment tax, but you may be subject to underpayment penalties.

The IRS (and the State of New Jersey, as well as most other taxing jurisdictions) expects you to contribute “ratably” throughout the year, just like a W2 employee.  It goes like this:  a W2 worker has taxes withheld every time he or she gets paid.    If the paycheck is large, the government gets more.  If the paycheck is tiny, the government gets less.  But either way, the government gets its cut way before April 15.  And they want this from the self-employed community, too.