Rachel Siegel poses in front of a bigs sign that reads Q&A. She's here to answer your questions.

The first quarter slipped away from me. Is Q2 too late for tax planning?

It’s never too late! Tax planning is actually a year-round endeavor, so while you may have missed out on last-minute spending opportunities, you can still proactively tackle several other ideas.

Now would be a great time to review how your business is set up, and whether that’s still optimal. As your business and income grow, the best structure for your business may change. Making changes early can significantly impact your 2022 tax burden. This is something you should review with your CPA and certified financial planner every few years (or more often if your business is growing rapidly or if there have been changes to the ownership).

While you’re on the tax planning topic, you should also take a look at your bookkeeping system. Still, relying on that shoebox full of receipts? Now would be a great time to organize and upgrade. This can be easily done with software like QuickBooks, and most bookkeepers and accountants still have time to help you through the process.


How much startup capital do most small businesses need?

Like everything else in life, the answer is, “It’s complicated.” According to the U.S. Small Business Administration, most micro and small businesses should have $3,000 to $5,000 to start. The Wells Fargo Small Business Index says $10,000 is more appropriate. While others, like The Kauffman Foundations study, suggest that the figure is more like $30,000. And honestly, none of them are wrong. It really depends on your specific business.

When calculating your startup costs, a good rule of thumb is to be able to cover six months’ worth of expenses upfront—don’t count on your revenue to start easing your costs until at least after that. You’ll want a cushion while you get your feet under you and work on attracting business.


How is an S Corporation more beneficial than other business structures?

An S Corporation, or S Corp, is a special type of corporation that’s designed to avoid the double taxation drawback of regular C Corps, partnerships, or even LLCs. However, the IRS places more restrictions on S Corporations. For example, these businesses are not allowed to have more than 100 principal shareholders or owners; and they cannot be owned by individuals who are not U.S. citizens or permanent residents. They must also have a board of directors and executive officers, and use either accrual or cash basis accounting.

But what you really want to know about is the tax benefit, right? Well, if you can overcome the restrictions, incorporating as an S Corporation means that the corporation itself is not taxed on its profits. The profits are passed onto the shareholders and are taxed as personal income, much the way an LLC is taxed.

S corps are also allowed to pay out dividends to their shareholders. Dividends come from the net profits —what’s left over after all expenses are paid. Shareholders are not required to pay self-employment taxes on these dividends, which is a savings of 15.3%. However, there is a catch: The IRS requires that active owners of S corps pay themselves a reasonable wage. That means you can’t simply take all the S corp profit as a dividend —you must pay yourself a salary, which will be taxed as standard payroll wages. How much will you save? It really depends on the business’ profits, how many partners are in the S Corps, and what your personal tax bracket is. But if you really think S Corp might be best for you, give us a call. We can walk you through it!


Should I use cash-basis or accrual accounting?

Like most everything else with accounting, that depends. Cash-basis accounting is often the simplest way to manage your books—you only record transactions when you physically make or receive a payment.

With accrual accounting, on the other hand, you must record money whenever a transaction takes place, even if you don’t physically give or receive money. You must record two entries for each transaction in a double-entry accounting system.

Generally, you can choose the method you want to use, but the government does require some businesses to use accrual accounting. For example, you must use accrual accounting if you make more than $5 million in annual gross sales or $1 million in gross receipts for inventory sales. You are also required to use accrual accounting if your business structure is a C corporation.

If you aren’t sure which is best, you can always choose to leave the heavy lifting to our team of bookkeepers. We love both methods!

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