Tag Archive for: Online Accounting

4 Signs Your Business Needs Online Bookkeeping

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White male business owner, hunched over on his couch, staring at a pile of documents with a calculator in hand

Bookkeeping is Holding You Back

Business owners know their companies like the back of their hands. They are the head of every department and perform the work of multiple people. Of all the roles they play, our customers express that the bookkeeper role is their least favorite. 

DIY bookkeeping holds business owners back from fully focusing on their business, which is why they decide to outsource it. Is it time for you to do the same? Let’s take a look at 4 signs that it could be time to hire an online bookkeeper! 

#1. Bookkeeping Takes Time Away from Your Business… and Your Life

Assess what bookkeeping is costing you. Is it taking significant time away from running your business? Let’s break it down. 

Suppose your time is worth $200 per hour, and you spend 10 hours per month doing your books. That costs you $2,000 per month just for bookkeeping! How much could you increase your sales? What else could you accomplish with that time? 

How does bookkeeping affect your personal life? Before partnering with us, many of our customers were up late at night and missed out on time with loved ones due to bookkeeping. Whether you are closing sales or enjoying a family dinner, your time is valuable. DIY bookkeeping does not make sense when you could be spending your time on the things that matter to you.

#2. Your Books are Behind

It is impossible to evaluate your business’ financial health when your books are behind. Old data cannot predict cash flow, track your revenue, or indicate if you are profitable. Out-of-date books may prevent you from making the best financial decisions for your business.

A professional bookkeeper can bring your books up to date. Bookkeepers input and classify your monthly activity. They also generate vital monthly reports such as Profit & Loss statements and Balance Sheets, which display your total income and expenses and your assets and liabilities, respectively. They also provide actionable insight to the current state of your finances. xendoo bookkeepers reconcile your books weekly to keep you on track for future success.

Guess what! You are not alone. 25% of business owners are behind on their bookkeeping. Whether you are behind a few months or a few years, xendoo will bring your finances up to date in no time. To get your books caught up, click here.  

#3. You are Not Sure if You are Doing Your Books Correctly

DIY bookkeeping leaves room for error, especially in the hectic life of a business owner. It is rarely anyone’s area of expertise (or passion). If your numbers are not adding up, do not wait until tax season to figure out why.      

Bookkeepers connect the dots between your sales, expenses, and profits to ensure business growth. They know how to properly categorize your transactions, keeping your books compliant and ready for tax season. At xendoo Online Bookkeeping, you can rely on your dedicated team of finance experts to deliver accurate statements and financial peace of mind year-round.

#4. Tax Season is Chaotic

When tax season rolls around, do you drop off a 30-pound box of receipts at your accountant’s office and hope for the best? After all the back and forth, are you disappointed by your tax refund? 

A chaotic and unrewarding tax season is a surefire sign that it is time to hire a bookkeeper. Your bookkeeper’s meticulous organization of your finances sets you up for smooth sailing during the most dreaded time of the year. 

Best of all, because your bookkeeper understands your business and your finances, they recognize every opportunity to maximize your tax savings! You will never have to worry if you pay too much in taxes. With a bookkeeper on your corner, you can walk into tax season prepared – and you will walk out knowing you maximized your tax savings!

The Importance of Bookkeeping

Bookkeeping is vital to the success of every business. It provides insight into your financial health and drives your decisions. When your books are in order, you can strategize effectively and plan for growth. Keeping your books compliant and up to date is crucial throughout the year so that you are ready for tax season. Consistent bookkeeping habits maximize your deductions and make an otherwise stressful time, a breeze. 

Bookkeeping is preventative care for your business. It puts a microscope on your finances to help you catch small problems before they snowball. A professional bookkeeper can take the stress of bookkeeping off of your plate so you can fully focus on running your business. 

xendoo Does it for You

Bookkeeping does not have to be an uphill battle. Let xendoo’s expert online bookkeeping and tax team handle the hassles so you can have more time for what you love!

Schedule your free consultation today!

 

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How Do I Pay Myself and My Taxes as a Sole Proprietor?

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Asian female business owner, working on her laptop in her art studio

Where to Begin?

Businesses are created because business owners have a passion that needs to be pursued.  They may be changing the world and even their own lives. Payroll, however, is most likely not their passion. Yet, every business owner faces the unique challenge of figuring out how to pay themselves.

Paying yourself as a sole proprietor can feel daunting. How much do you pay yourself? How do taxes factor in? Unless you have a side hustle as a financial advisor, it can be difficult to know where to start.

Self-Payment, Simplified

Breathe a sigh of relief. Paying yourself as a sole proprietor is not as complicated as it seems. Tax filing is simplified too! In this blog post, we will walk you through paying yourself as a sole proprietor!

 

How Do I Pay Myself?

You can pay yourself as a sole proprietor by taking an Owner’s Draw. An Owner’s Draw differs from a regular salary in that you can take money from your earnings as needed. Depending on how well your business is doing, you can take more or less, allowing for flexibility in your payments.

If your business is profitable, start by subtracting liabilities (any debt your company owes) from assets (items of value the company owns that will provide benefit in the future). The remaining amount is referred to as ownership equity, which is what you will take your draw from. Once you decide on an amount to take (more on that in a moment), it can be transferred from your business bank account to your personal account.

Because the Owner’s Draw is taken from ownership equity, it reduces the funds that can be used for the business. Sole proprietors must balance how much they need to support themselves and what their business needs to thrive.

How Much Do I Pay Myself?

To set an appropriate payment for yourself, you have to determine your projected profits. To estimate how much you can draw and when you must:

  • Set up a separate business bank account. As a sole proprietor, you do not need to incorporate or register your business. The business name will default to your legal name unless you file a DBA (doing business as), which allows you to operate under a different name. Once your DBA is set up, you can open a business bank account. This ensures that your personal and business expenses stay separate, and creates an accurate picture of your business’s finances.

 

  • Keep your books up to date. Keeping detailed records of your income and expenses will help you identify when cash flows into and out of your business, and how cash flow may change over time. An online bookkeeping service will be able to take this task off your plate, saving you time and stress. You will also receive monthly reports that give you actionable insights to help you make the best decisions for your business.

This will help you determine your projected profits and when you should take your draw. You can start out by paying yourself only what you need to meet your basic needs until your business breaks even. From there, you can increase your pay to your “market value”. You can increase your pay again once your business is producing consistent profits. How often you choose to draw is up to you. Some may follow a bi-weekly schedule, others may draw as needed. It ultimately depends on your personal preference.

How to Pay Your Taxes

Sole proprietorships are considered pass-through entities, meaning the IRS views your business, personal assets, and liabilities as one and the same. Because of this, you are only required to file a personal tax return. Income and expenses related to your business are accounted for on your individual Form 1040, Schedule C.

While the Owner’s Draw is not subject to federal or state income tax, it is also not expense-able. It will appear under the total net income of the business, which is taxable. Be aware that sole proprietors are required to withhold self-employment taxes, which contribute to Social Security and Medicare. As of right now, the self-employment tax rate is 15.3%.

So, how can you maximize your tax savings? Business tax preparation and filings are included with almost all of our packages! Your online Tax CPA takes care of filing your Schedule C that goes along with your personal tax return to itemize business deductions.

xendoo is Here for You

The good news is that you do not have to figure it all out on your own. xendoo Online Bookkeeping is here to help! We move at the speed of business, so you can make informed decisions faster – like deciding how much you should pay yourself as a sole proprietor! Get started with a free trial.

Ready to take the next step? Schedule a free consultation with a xendoo accountant today!

 

Want to learn more? Learn the difference between the business entity types here. 

 

 

Online Bookkeeping Services for Small Business Owners

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Black male consultant points to a laptop screen with bookkeeping plan details. He is discussing options with a potential customer, who is out of frame.

Author’s Note: This post was updated on February 23, 2022, with new information, links, and resources.

Bookkeeping is vital to the success of every business, but business owners rarely have the time (or desire) to manage it themselves. Many small businesses save time by partnering with an online bookkeeping and accounting team. However, there are some key features to consider when selecting online bookkeeping services for your small business.

What Is Online Bookkeeping?

Online bookkeeping, also called virtual bookkeeping, means managing your bookkeeping remotely. 

A virtual bookkeeper works directly with your business to manage your company’s accounting and financial reporting. Typically, your company’s financial activity, records, and transactions will be stored in cloud-based accounting software that you are able to easily access.

An online bookkeeper will initially undergo a consultation with you to understand the needs of your business and your regular financial activities. Then, they can set up a system to generate sales invoices, manage accounts payable, and process payroll. With the right online bookkeeper, you can regularly view your company’s financials and make strategic business decisions. How do you choose the right financial partner for your business?

There are many options available, ranging from traditional CPAs to tech-savvy online providers. 

Today, we will take a look at two popular options: xendoo Online Bookkeeping and Bench. Both provide quality bookkeeping and tax services, but there are some key differences in features that may tip the scale for you: 

  • Online bookkeeping and tax services 
  • Additional services
  • Accounting software 
  • Free trial

In this blog post, we will explore these differences so that you can make the best choice for your business.

Online Bookkeeping Services and Taxes

xendoo’s online bookkeeping and tax packages start at $395. We reconcile your books weekly, and deliver your reports as early as the 5th business day of the month, depending on the plan you select. 

 

What Services Do Virtual Bookkeepers Offer?

You may also want to consider what other financial services your business needs. A virtual bookkeeper offers a wide range of services. These may include any of the following:

Cash Reconciliation

Your company may have many cash transactions throughout the month. These can include payments, receipts, and other items. A virtual bookkeeper can connect your cash and lines of credit with your accounting system to record transactions as they occur automatically. 

Accounts Receivable Management

As a business owner, you likely don’t have a lot of time to chase down overdue payments from your customers. Instead, your focus is on growing and managing your business. A virtual bookkeeping service can assist you with client account collections and ensure that any significantly overdue accounts are brought to your attention immediately.

Accounts Payable Management 

Rather than relying on what you think you have incurred in expenses for the month, you can allow a virtual bookkeeper to record actual and expected expenses. This approach allows you to strategically plan your outgoing cash flow for the upcoming weeks.

Cash Flow Management

Cash flow management tracks the money that you have coming into and out of your business. Online accounting services should provide a clear picture of your cash flow. Simply put, money coming in from revenue should be greater than money going out for employee pay, vendors, tools, and other expenses.  

Financial Reporting

Accurate financial reports are an important part of the monthly accounting process. xendoo’s financial reports include profit and loss statements and balance sheets. Plus, you can view reports from anywhere with the mobile app.

Tax Preparation

Frequently, online bookkeeping services will offer tax preparation services. This service can save you a lot of time and effort. You can also make sure that your tax return will be completed by someone who understands your company and its financial performance. 

What if you are behind on your bookkeeping? Outside of the ongoing subscriptions, xendoo and Bench offer catch up bookkeeping services so you can get previous months’ books in order!

Accounting Software

There are a number of online accounting software systems available. The most popular include QuickBooks Online and Xero. Both of these services are cloud-based, with modern user interfaces that are easy to interpret. They integrate with a number of third-party applications, which gives them greater functionality. 

Prices for both systems are much less than you would pay for a full ERP. However, both systems allow for a wide range of reporting tools that are perfect for small business accounting. 

They have the ability to reconcile cash accounts and provide accurate accounts receivable and payable reports. You may also generate a full set of financial statements for monthly reporting purposes.

The biggest difference between xendoo and Bench is the software used to do your bookkeeping and accounting. 

xendoo works with both Quickbooks Online and Xero. The biggest advantage of these two programs is that you own the software. Working with Quickbooks Online and Xero, you will always have access to your financial records, no matter who does your bookkeeping.

Bench only uses its proprietary software, which does not integrate with any other accounting programs. If you ever need to leave Bench, your records will not go with you and your financial history will have to be rebuilt. If you want to be able to hold onto your data, Bench may not be the best choice for your business. 

Try Us Out

xendoo offers a free trial. The online accounting team completes your books from the previous month and provides a Profit and Loss Statement and Balance Sheet. 

What happens if xendoo is not the best fit for you? In that case, we will gladly connect you with others in our network so you can find your ideal financial partner. The completed books and financial reports are yours to keep in your QuickBooks Online or Xero subscription! 

If you decide not to work with Bench, you can hold onto the financial reports, but you will no longer have access to the previous month’s bookkeeping as it is done in their proprietary software.  

We’ve done a detailed xendoo vs Bench comparison, but we’ve highlighted key differences in the chart below: 

*Some options may only be available on certain plans.

Who Is Right for You?

It depends! Every business owner needs their bookkeeping done, and they deserve the freedom to take their data with them. xendoo Online Bookkeeping works with industry-standard accounting software, ensuring you will always have access to your financial records and data.

Are we a fit for your business? Schedule your free consultation today!

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How an Online Accountant Can Help Your Business Recover Post-COVID

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An eCommerce seller adds items to her online store.

An eCommerce seller adds items to her online store.

Everyone was affected in one way or another by the COVID-19 pandemic. Whether it was by contracting the disease, dealing with illness in your family, or just the extended effects of the shutdowns and restrictions, this global event didn’t leave anyone untouched. 

For business owners, the challenge of keeping the doors open and the lights on has been significant, despite government efforts made through the CARES Act. Depending on your industry, you may have had to operate in a significantly modified capacity – or you may not have been able to operate at all. Sadly, many businesses did not make it through the pandemic and were forced to close. As restrictions start to lift in many areas, business owners need to carefully construct a plan for getting back on track. 

In this post, we’d like to focus on business recovery. Specifically, we’d like to talk about how your business can lean on an accountant to aid with the various elements of the recovery process. Let’s take a closer look. 

An online accounting service is always important

Before we dive into the specifics of business recovery after the pandemic, we should state the obvious – a good accountant is always important. Whether times are good or bad, the work a reliable accountant does for a business is indispensable. Keeping accurate books, producing financial reports, and paying taxes are all important no matter what is going on in the world. 

With that said, the road to recovery after such a long and difficult stretch is sure to be challenging. Countless businesses are vying for the attention of consumers and clients, and even more are going to close in the years ahead. You can’t afford to let any advantage slip away, and having a trusted accountant by your side is a big opportunity that can help grow your business.

What roles does an accountant play in your business recovery?

The list below highlights some of the specific ways an accountant can help guide your business through the months and years ahead. 

  • Covering the basics. In difficult times, it’s even more important to make sure the basics of doing business are covered. And there is nothing more basic in the business world than keeping accurate books. With an accountant available, you can make sure bank statements are reconciled, financial statements are prepared in a timely manner, and more. Whether you need to do some catch up bookkeeping or you just want to open up time in your schedule, an accountant is the answer. 
  • Collecting every dollar. Okay – so you’ll probably never be able to collect every single dollar that is owed to your business, but a good accountant will work hard to collect on as much of your accounts receivable as possible. In this kind of business environment, every single invoice is important, so you don’t want to let any just slide through the cracks. 
  • Chart a recovery timeline. It’s quite likely that your business isn’t in great financial shape at the moment. That’s certainly understandable, and you aren’t alone. With the help of an accountant, you can plan out a path to recovery that is reasonable and attainable based on your financial reports and projects. It will be difficult to plan a recovery effort without an accountant to bring some accuracy to the financial side of things. 
  • Seek funding. Finally, your accountant may be aware of some loan options or other funding sources your business could consider. Fewer and fewer resources are going to be available to businesses as the pandemic wanes, so knowing where to look for financial support is important. 

Why you should outsource your accounting

There is a flip side to all this talk about the importance of accountants – they aren’t free. It costs money to hire an accountant, and during such difficult times, you might be tempted to do as much of the accounting work yourself as possible.

Fortunately, outsourced accounting and bookkeeping is an affordable alternative and sort of a middle ground between hiring a full-time accountant and taking the DIY approach. When you outsource accounting and bookkeeping, you can bring down overhead costs in the back office while simultaneously getting the expert help and input you require to save time and make decisions. Your business needs you to lead the charge toward recovery, and that’s going to be hard to do if you are sitting in the back with your nose buried in spreadsheets. 

Conclusion

xendoo loves to take the stress out of accounting. We have been serving businesses since long before the pandemic began, and we are proud to be here to help all kinds of business owners make it through this challenging time. With reliable, affordable, and versatile services, you can lean on xendoo to keep your financial house in order. 

Tips to Increase Retail Sales for Your Small Business

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A restaurant worker helps two customers purchase wine

This past year has been incredibly hard on retailers, especially small businesses. Retail sales plunged more than 20% between February and April last year, but with pandemic restrictions easing, the industry is starting to recover. As folks are venturing out more, it’s the perfect time to refresh yourself and your sales associates on tips to help increase retail sales and work towards building your business back up!

Make your customers feel safe

Many people are finding it tough to return to their pre-pandemic selves quickly and are still moving with caution. Help them feel at ease by reminding them they are safe in your shop. Take note of what protocols major retailers are following. For example, hand sanitizer can be available at the entry and the register. Use signage to share your mask policy, cleaning protocol, and any policies on the dressing room or how to use ‘tester’ products. The safer customers feel, the more likely they are to purchase, which will help increase your retail sales.

Curbside pickup and local delivery

 Many stores began offering curbside pickup and local delivery in 2020, and most customers have become accustomed to these services. Keep in mind that today’s customers value convenience,  so continue to offer these alternative methods moving forward. 

Train your staff

While refreshing your team on cross- and up-selling, ensure they are up to speed on the basics, too. For example, do they need a reminder on any specials or promotions you offer? Ensure they are experts on your store’s products and are as informed as possible on your customer service expectations. Please encourage them to think ahead about how they might answer specific questions customers might ask, including all frequently asked questions. If your staff can put your customers at ease, they are more likely to purchase from you than your competitors.

 

A sales woman upsells a product to a customer at checkout

Cross-selling and up-selling

The savviest sales associates know how to cross-sell and up-sell. When a customer is interested in one particular item, the savvy salesperson suggests a corresponding item to go along with it. “If you like that, you will love this, too!” Up-selling suggests a more expensive alternative to the item the customer is already interested in buying. “Oh, that one you have is great, but have you seen this (more expensive) version?” If your customer leaves with an item they will enjoy more and feel like they got a great deal, they are more likely to be a repeat customer, which can further help increase retail sales.

Merchandising

Make the way you merchandise or display your products a priority. Keep your displays fresh and regularly move merchandise around the store, creating a sense of newness and having your regular customers look at products they may have otherwise passed. Feature new and seasonal products near the entrance. Keep everything clean and organized, and ensure it’s easy to navigate the store. Keep popular and inexpensive items near the registers to encourage impulse purchases during check-out. It would be best to keep up on your inventory accounting to ensure that those displays have enough product.

Make it personal

 80% of companies are more likely to purchase from a company that offers them a personal experience. So, how might your store offer a personal touch? Branded items are a great way to connect with your customers creatively – ensure your logo or taglines are on bags, receipts, and automated email receipts. Consider slipping an extra treat into shopping bags, too. Perhaps a small button or magnet with your logo and website. And the best way to get personal is to connect with your customers. Make it a priority to chat, remember their names, and take note of the types of products that interest them.

Loyalty programs

Customers love loyalty programs! Many small businesses still enjoy using classic “buy 10, get 1 free” style punch cards, but there are great digital-focused loyalty programs, too. Options like Loopy Loyalty and Smile.io encourage customers to shop with you again and engage with your brand. And get creative! These programs offer ways to customize the program to match your branding and speak to your customers. As you build your loyalty program, ensure you aren’t creating an unattainable goal. Earning $5 for every $25 you spend feels much more exciting than earning $1 for every $50, right!?

Make time to analyze

Small retail store owners are notoriously stretched for time, but it’s essential to set aside time to review what sales tactics are working and what aren’t. Look at the numbers and strategically think about what might have led to increases or dips in sales on any given day. This is where having professionals like the team at xendoo manage your retail bookkeeping can go a long way. You can quickly review the numbers through accurate and timely reports and determine the most effective sales strategies.

It’s an exciting time for retailers to have a fresh start! Seize the opportunity to train your staff on new sales tactics, refresh your inventory offerings and displays, and get creative with new ways for your customers to engage with your brand. By outsourcing your bookkeeping and accounting to the team at xendoo, you’ll save time and money, and you’ll finally have the data you need to be more strategic about increasing retail sales and remaining profitable.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

How Outsourcing Accounting Can Help Grow Your Small Business

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A painter looks at her phone and laptop

Small business owners are notoriously short on time. They manage everything from sales and marketing to employee scheduling and benefits, not to mention being an expert in whatever good or service it is that their business offers. And there are hurdles every step of the way as you try to grow your business. Hiring an outsourced accounting service can help you tackle many of these including ensuring you don’t pay too much in taxes, that you have time to focus on sales and marketing, and that you are able to prepare thorough financial reports for investors.

Why is an accountant important in a business?

Accountants consider the big picture strategy needed to keep your business strong and growing. They can answer your questions about financial reports, cash flow, depreciation, and more. They can give tax savings advice, such as when to make capital purchases, what you can deduct, and how to reduce taxes on capital gains. They can identify opportunities to improve profit margin and business growth and keep you legal – preventing missed deadlines and noncompliance penalties. 

When you’re looking to grow your business but don’t have the time or resources to do so, hiring an outsourced accountant or outsourced accounting service like xendoo can free up your time and provide insights and ways into how you can increase your cash flow, strategically prepare for your taxes, and focus on what you do best.

Closeup of two plant sprouts growing

How does outsourcing accounting help your business grow?

It’s not just keeping track of your financials. Outsourcing an account can help your business grow in the following ways:

Accountants help save money

We can tackle the reinvestment more in detail here and use the tax preparation anchor here. 

Accountants help small business owners save money in many ways, including through strategic tax preparation. They help you make smart decisions on your operating expenses, when to make big purchases, and what deductions you can make. Many small business owners spend too much money on taxes – an accountant can help you prevent overspending on taxes and help you strategize on how to cut costs in every area of operation. The money you spend on an accountant is an investment into your business and will help you grow by saving you money in the long run and leaving you with more money to invest back into your business. 

Accountants help save you time

Time can be spent on marketing and other business growth while they look into the books.

Small business owners have enough on their to-do list – when you’re looking to outsource some of the work and focus on growing, outsourcing accounting and bookkeeping services are the best choices. Bookkeepers and accountants will do a better job at a quicker pace than a small business owner who is strapped for time and whose talents might lie elsewhere. You’ll be able to focus on sales, marketing, and all of the other ins and outs of growing your business when you aren’t worrying about accounting.

Outsourced accounting services are scalable

As you grow so can your services without the need to hire FTE. 

Your outsourced accounting team can easily grow as your small business does. You won’t need to hire a full-time employee to handle your accounting when you have a scalable outsourced accounting team on board. You can skip the hassle of hiring and managing a full-time employee as you grow (and save on the need to offer expensive benefits, too!) by hiring outsourced accounting services like xendoo.

Better business analysis

Gives you accurate insights into your business strengths and weaknesses, which is important if you want to expand. Investors will want to see accurate books. 

As you grow you will continuously need better analytics on your business. An outsourced accounting team can provide accurate insights into your business strengths and weaknesses, helping you strategize on how to grow. And when you’re ready to take on investors or apply for a line of credit the banks and investors will want to see accurate and detailed financial reports. By having an outsourced accountant on your team, you will be able to show investors and banks precise, up-to-date records and prove you take your finances and the growth of your small business seriously.

Help increase cash flow

Keep track of outgoing and incoming money. Can find ways to help you save money long term with paying on time or ahead, and chasing down delinquent invoices. 

A key strategy to growing your business is taking charge of your cash flow. Outsourced accounting services like the team at xendoo can keep track of your incoming and outgoing money and can help you find ways to save money in the long term – through strategic tax preparation, cutting operational costs, and paying your bills on time or even ahead of time! And they can help you chase down delinquent invoices from clients who are behind on paying you. Your accounts payable and receivable will be closely monitored and managed without you ever needing to worry about it.

Outsourcing accounting can help you grow your business.  By outsourcing your accounting, you can save money on hiring a full-time accountant, plus, it will give you more time to focus on running your business and creating value for your customers and your employees.  xendoo is all about providing timely and accurate financial information to business owners allowing them to make strategic decisions. If your business is struggling, know that there is a better way and xendoo can help. 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

Pass-Through Deductions: What It Is and Who Qualifies

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pass through deductions

One of the best small business-friendly aspects of the Tax Cuts and Jobs Act (TCJA) is the 20% deduction you can take on your income tax if your business is a pass-through entity. Here’s what you need to know about it.

What Is the Deduction

The TCJA was passed in 2017 and first applied to 2018 tax returns. Provision 199A of that law states that you can deduct 20% of your “qualified business income” which was earned from a “qualified trade or business.”

What Is a Pass-Through Entity

Any business structure that allows you to receive income as an “owner’s draw” rather than as a regular employee is a pass-through business. The money is “passed through” from the company account to your personal account. You only pay income tax on it with your personal return; you don’t have to file a separate return for the business.

Pass-through entities include:
• Sole proprietorship
• Partnership
• LLC (limited liability corporation)
• S-Corporation

However, there are some restrictions.

Taxable Income Restriction

• Less than $157,500 (single, married filing separately, head of household) or $315,000 (married filing jointly): you qualify for the full 20% deduction.
• $157,500 – $207,500 or $315,000 – $415,000, respectively: your deduction may be less.
• More than $207,500 or $415,000, respectively: you are not eligible for the deduction.

Specified Service or Trade Restrictions

What your business does may disqualify it from the deduction. Here’s the list of excluded fields, as issued by the Treasury Department in August 2018:

• Health
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Any business where the principal asset is the reputation or skill of one or more of the employees or owners
• Any business that consists of investing and investment management, trading or dealing in securities, partnership interests or commodities

But don’t give up if you see your business in one of these categories, because there are numerous exceptions. For example, in the Health category, healthcare providers who provide services directly to patients — such as doctors and dentists — are not eligible. On the other hand, health clubs, spas, medical research companies, and those who sell pharmaceuticals or medical devices may qualify for the deduction.

In the case of businesses who both provide services and sell products, eligibility is determined by sales:
• Less than $25 million in gross receipts and less than 10% of your business comes from disqualified services; or
• More than $25 million in gross receipts and less than 5% of your business comes from disqualified services

Employee and Property Restrictions

There are two further conditions that could affect how much of a deduction you can take. They are:
• Business that pay W-2 wages
• Business that owns “qualified property” such as real estate or other tangible assets that can be depreciated

If your business fits either of these descriptions, your deduction will be the lesser of:
• 20% of qualified business income (or the “tentative deduction”); or
• The greater of:
o W-2 wages paid x 50%; or
o W-2 wages paid x 25% + the unadjusted basis (cost) of your qualified property x 2.5%

Still confused about the pass-through deduction? Your xendoo small business expert can clear things up, answer your questions, and help you get every tax break you deserve.

 

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