Regardless of which philosophy you subscribe to – paying taxes as a necessary evil or blessed to earn enough to have to pay taxes – no one wants to give the government a penny more than is required. With a little know-how, smart planning, and a savvy tax partner, small business owners can whittle their tax burden to the bare minimum, experts told Woodall’s Campground Management.
Like most small businesses in the U.S., you are very likely hot and heavy into tax preparations for tax year 2014. Your smartest strategy at this point is working closely with a certified public accountant (CPA) specializing in small business matters. Why? Business deductions and credits from energy incentives to health care credits and more change from year to year.
“A good CPA can identify local, state and federal incentives and tax breaks that a small business owner may not be aware of, in turn saving much more than their fee,” noted Rick Stauter, CPA and owner/operator of Cutty’s Hayden Creek Resort, a Cruise Inn RV Park in Coaldale, Colo. Park owners/operators are focused on running the business and bettering the bottom line through operations. A CPA, on the other hand, is well versed on the ins and outs of the ever-changing tax laws and how they can benefit your business.
Marcia Rousseau, a CPA and co-owner of Magnolia RV Park & Campground in Kinards, S.C., agreed wholeheartedly and suggests your association with a tax professional should be a partnership, one founded on mutual respect with an eye toward growing your business with smart financial advice. “This should not be an adversarial relationship. Your accounting partner should offer suggestions, ask pertinent questions, and provide solid advice for your consideration. You should feel as if they are on your team,” she told WCM.
“Oftentimes I’ve seen business owners shy away from hiring a professional because of past condescension. They walk away from important conversations feeling like an idiot. This is not necessary or productive,” Rousseau continued. “If a business owner is interested in changing CPAs or does not already have one, ask around for references. Soon a pattern will appear, making your decision clear.”
Rousseau also cautions against miscategorizing the relationship. “You should see your CPA as a partner but let’s be clear, that’s much different than a confidant. CPAs do not enjoy client confidentiality like attorneys do,” she explained. “We can’t unhear something you tell us, for example your cash reporting philosophy. If for some reason we are asked about your business by the IRS, we can’t lie and we can’t withhold information.”
Certainly it’s easy to get overwhelmed by the operational side of the park business but the importance of staying on top of financials is imperative, for a number of reasons. “Organizing and tracking your income and expenses throughout the year can offer you not only clarity at tax time but a snapshot of the health of your business year-round,” said Eileen Gedicke, CPA and owner/operator of the Yogi Bear’s Jellystone Park-Camp Resort at Gloucester Point in Hayes, Va.
Up-to-date financials can aid owners/operators in many ways. If a large purchase is in order, what type of loan is the business worthy of? Is the business experiencing any type of fraud or embezzlement? Beginning in the third quarter, a clear financial picture can help determine the state of the business and year-end tax planning including possible tax-saving measures such as purchases. “Keep in mind, however, that year-end purchases made to reduce your tax burden may not be the best decision for your business as a whole. Examine your books and consider your business’ situation. Purchases are not solely tax decisions,” added Gedicke.
With tax year 2014 coming to a close and tax particulars top of mind, it’s an ideal time for business owners to review their bookkeeping practices and update their organizational procedures. Gedicke noted, “in this day and age, with the capability of computerized ledger programs as well as a number of very good manual systems, there’s no excuse for the proverbial shoebox of receipts to be an organizational method. We’re all busy. If you don’t keep track will you really remember the particulars of your spending 12-14 months ago? You’ll be asking yourself ‘What was the thinking behind this?’ ‘How did I handle that?’”
The key to successful organization lies not in the type of system — though Quick Books and One-Write seem to be top choices — but in the business owners’ comfort in using it. Considerations must include how much time can be devoted to the process, is it easy to use and does it make sense, and will they keep up with it. Set a routine. Can you devote an hour a day, a couple hours three days a week, half a day once a week? The schedule matters much less than the commitment.
Rousseau emphasized the importance of setting up the system correctly from the beginning. “Junk in. Junk out. If your accounting program is not set up with useful, correct categories, etc. on the front end it may be more challenging to use as you constantly try to define each expenses proper category and the reports you receive may not be meaningful to you or your tax professional.”
Staff and Service Classification Considerations
Always at odds in the park industry is the classification of workers. “The IRS has a very clear definition of employees vs. contract labor,” stressed Stauter. “If you hire a person and their day-to-day actions are subject to your direction – duties, break and lunch times, schedules, etc. – then the IRS considers them employees and employers are required to follow the tax withholding laws. If you hire someone to complete a job, say repair your roof, and are paying them for a job result, they are contract labor.”
Employees complete a W-4 form at hiring and are issued a W-2 form at year’s end. While taxes are not withheld from contract laborers, businesses must report total payments of $600 or more to the government.
It’s in your best interest to require completion of a W-9 before contract laborers begin any work, even if you do not anticipate paying out more than the $600 threshold. Withholding pay once a job is finished — be it a $100 job or a $1,000 project — until a W-9 is completed is not looked upon fondly. Gedicke calls this advance step “the first defense in compliance” and can aid in avoiding IRS interest and penalties. The corresponding year-end income reporting form for W-9 workers is a 1099-MISC.
This is an important area that small business owners, unless experienced in payroll reporting, should turn over to professionals. Payroll companies such as ADP and Paychex are leaders in this field and can help you and your tax professional automate these reporting forms. “Errors in payroll reporting can result in serious IRS consequences that can haunt you for years,” added Rousseau. “This may not be the wisest area to choose to save money by bypassing a pro and doing it yourself.”
Another tax reporting consideration is bartering. For instance, say an entertainer performs at your Saturday night dance in exchange for a stay at your park, or a work camper puts in x-amount of hours in exchange for their site. Seems reasonable, right? While perfectly legal, tax laws still apply. If you choose to barter, Gedicke suggests small business people be careful about giving products or services without knowing the potential consequences. She recommends proper reporting, treating the exchange as a cash exchange, and being prepared to do the paperwork. In addition to federal taxes, ask yourself if municipal and state lodging taxes apply, and act accordingly. “The IRS doesn’t have a problem with bartering, they just want their cut,” Gedicke said. This means a business must report the income value of the service received – in this example the dollar value of hiring the musician or work camper – and treat the traded lodging as pay, reported via a 1099-MISC.
The Internal Revenue Service Website (www.IRS.gov) offers these clarifications regarding bartering:
Barter income: Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.
Tax implications of bartering: Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.
It’s a fact of life: the taxman cometh. While no one’s favorite activity, executing smart tax strategies is smart business. So rather than bellyache about tax rates, fear the IRS’s wrath of non-compliance, or tear your hair out trying to sort through the shoebox, make the time to secure your business’ financials. Hire a trusted partner, ramp up a robust accounting system, and commit to organization.
As Gedicke said, “Look, as a park owner I know that our books at our desk are not what’s making us money. Unless you are a tax professional, bookkeeping, record keeping, classifications, and general ledgers are not your forte. That’s the biggest downfall I see in small business accounting. Owners tend to push stuff aside, working their craft 24 hours a day, seven days a week. Be that as it may, someone should be looking after their financials. You could be missing out on opportunities, tax breaks, special financing possibilities, and more.”
Coming to terms with the onerous yet critical need to take care of the financial side of your business and implementing a strong plan will allow you to assess your business’ financial health, make wise purchasing, hiring, and staffing decisions, and breathe a bit easier every April 15.
What Don’t You Know?
So what are some smart tax moves that are not well known? Each of our three tax experts/park owners/operators weighed in on what they considered to be savvy tax/financial moves:
Gedicke: “If you receive a call or letter from the IRS I recommend you send that directly along to your CPA or tax professional. I would not advise any businessperson to handle the IRS on his or her own. A professional serves several purposes in this situation. They are a buffer of protection and have the ability and skills to work with IRS, they’re not intimidated, and they can confirm that the request is legal. The IRS has a right to request lots of documents but, generally speaking, aside from those suspecting criminal intent and other serious concerns, they do not have the right to walk in and request them on the spot. You should be afforded time to get your books together and more often than not are not required to provide original documents. Your tax pro can confirm who the agent is (this can be done via IRS.gov) and what they are looking for. Is it specific? Is it a fishing expedition? Be careful not to give the IRS more than they are asking for. Certainly you want to cooperate, however, a typical (and unwise) reaction is to open everything to scrutiny. That very well may not be a requirement of what they are asking. Again, this is an occasion to call upon your tax partner for assistance.”
Stauter: “If you have family members that do work at your park consider hiring them as employees. As an employer you’re required to deduct income tax withholding from their earnings, essentially paying into their social security and Medicare accounts, affording them future benefits. You’ll also be able to deduct half of the tax from your return.”
Rousseau: “Coming into this business I didn’t realize the tax value of land improvements. The cost of land improvements such as adding new sites, underground wiring, sewer, pads, etc. can be depreciated over 15 years whereas land itself is not depreciable. It turns out that you can allocate a decent chunk of money, thus long-term tax savings, to land improvements.”