Heather Villa, the creator and chief executive of online bookkeeping service IAC-EZ, New York, created a Q&A dedicated to helping small business owners prepare their 2008 taxes during a severe recession.
Q: As new business owners work to prepare their 2008 taxes, what new changes do they need to keep in mind?
A: You should take advantage of the Section 179 depreciation deduction where you can, as the limit has doubled from $125,000 in 2007 to $250,000 for 2008. In this way, Section 179 can be used to maximize your equipment investments.
Q: So many small businesses have suffered financial losses due to the economy. How will this factor in to how they prepare their taxes for 2008?
A: If your business suffered financial losses, both your overall business and personal taxable income will be reduced. Make sure you have your year-end statements from investment brokers that clearly reflect these losses. For small businesses suffering a net operating loss, remember to opt to carry it forward to 2009.
Q: How can accounting software help entrepreneurs who have previously relied on handwritten ledgers or "homemade" accounting on their computer?
A: Accounting software, if utilized correctly, helps you "see everything at a glance." Handwritten ledgers help you keep track, but don't produce the reports you need. Thus, every time you make a change or a month passes, you need to re-create your profit and loss statement. Accounting systems can generate that for you in two "clicks." This is very important when you want to keep an eye on your business.
Q: What are the big red flags that will attract the attention of the IRS?
A: For businesses: A net operating loss three years in a row is a red flag because the IRS would then consider your company to be a hobby rather than a business. Also, excessive meal and entertainment expenses, excessive travel expenses (when a business is in a category that does not require high levels of travel) and non-matching inventory and balance sheet reconciliations are also red flags.
For individuals: Some of the red flags include claiming a dependant who you did not claim the year before, reporting a large amount of medical expenses and inappropriately claiming the EIC credit in previous years.
Q: How can businesses analyze their tax returns to make changes that can improve their bottom line for 2009?
A: Calculating percentages is important. Make sure your total annual expenses are not too large a percentage of your overall income and make adjustments as necessary. For example, if advertising is consuming 50% of your income, then it is probably too high. Use your tax return to analyze percentages and create next year's budget.
To learn more about Ms. Villa and her services, go to
