Regularly conducting a competitive analysis helps keep up with trends and technologies while identifying gaps in your business.
- You may want to conduct a competitive analysis every quarter or once per year, or when releasing a new product or trying to grow a business quickly.
- Steps to conduct a competitive analysis:
- Identify key competitor
- Assess their pricing structure
- Research competitors’ marketing and sales strategies
- Pay attention to competitors’ content and online presence
- Identify any technologies and tools you should incorporate
It’s helpful for any business to know what’s out there in the market, even if yours has been established for a while. Competitive analyses assess the industry and look for gaps in the marketplace. They help an organization keep up with trends, so it’s never falling behind competitors. And they assist in devising more effective marketing, enabling business growth.
So, when should you conduct a competitive analysis? And how do you go about doing it? Here is a guide to some best practices:
When to conduct a competitive analysis
Depending on the industry, you may think that what you have will never go out of style and always be unique. That might be the case, but consumer priorities and preferences continuously change. These shifts may be due to trends or sudden, major events. For example, a service to clients where you typically meet in-person likely shifted to virtual meetings during the pandemic.
You should stay up to date on what’s happening in your industry and with your target audiences. It takes research and evaluating competitors provides even more insight into how to keep improving. The effort involves assessing what other businesses are doing and what works for them and what doesn’t. You may uncover gaps they’re not filling and find a new service, product, or market.
When was the last time you did a competitive analysis beyond the quick perusal of a website? You should be conducting them regularly so that you’re not missing opportunities or threats.
Otherwise, essential times to conduct a competitive analysis include:
- When you’re working on a new service or product
- When you’ve noticed a dip in sales or interest
- When you see a competitor doing really well
- When you’ve received negative customer reviews
- When you want to improve marketing campaigns, including reach and ROI
- When you’ve noticed changes to your bottom line or cash flow
- When you want to scale and grow the business
It’s never a bad idea to set a goal to do a competitive analysis at least once a year or even quarterly, especially when a business is in its early stages and is still changing rapidly.
How to conduct a competitive analysis
Whether you’re releasing something new or just conducting an annual competitive analysis, here are some steps to do it:
1. Identify key competitors
First, create a list of your closest competitors. These are the businesses that are similar in size, scope, and products or services. They also may serve your same geographical area and thus your ideal audience. Identifying your biggest rivals is vital to ensure you’re looking at information that relates to your organization the most.
2. Assess their pricing structure
How are competitors pricing their products? You won’t be able to effectively price yours without looking at what the competition is doing and accounting for the market. You can then decide whether to charge more because you have a leg up on quality, offer an additional perk, or price below competitors to provide a more affordable option.
3. Research competitors’ marketing and sales strategies
Where are they investing their dollars? What tactics are they using to reach people? Are they doing something exciting and bringing in new customers? What can you incorporate into your marketing approach that will do the same? Are they missing out on an opportunity that you could leverage?
It is crucial to understand what others in your industry are doing to attract leads and get the word out about their products or services.
4. Pay attention to competitors’ content and online presence
Similarly, also look at the type of content competitors produce and where they’re posting it. Most important here is probably social media and perhaps a blog.
What social platforms are they most engaged with, and how are customers responding? How often do they post? Are they engaging with people? Do you notice anything they’re not doing that would help them in their strategy, like focusing more on design or hiring a content editor?
5. Identify any technologies and tools you should incorporate
Finally, a competitive analysis reveals innovations and technologies that have become prevalent in your industry. Sometimes, simply adopting a new software platform can do wonders for your competitive edge. Research the tools that others are using, their cost, and their potential benefits.
Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.
Self-employment offers many benefits, but taxes can seem like a bigger burden. Here are some FAQs with detailed answers.
- Eight self-employment tax FAQs:
- Am I considered self-employed by the IRS?
- What is self-employment tax?
- Do I have to pay quarterly taxes?
- How do I figure out how much to pay quarterly?
- How do I pay quarterly taxes?
- Do I still have to file an annual tax return?
- Can I take the home office deduction?
- What business expenses can I deduct?
When individuals take the path of self-employment, they gain flexibility and can pursue what they’re really passionate about. But many new entrepreneurs quickly get into headache territory when tax season rolls around. And self-employed workers have to worry about taxes all year long, not just in the spring.
You likely have questions about self-employment taxes if it’s your first time trying to understand how it all works. Here is a list of the most common questions (and answers!) concerning self-employment and taxes:
1. Am I considered self-employed by the IRS?
The IRS outlines specific guidelines for workers to be considered self-employed, including the following:
- You are a sole proprietor or independent contractor carrying on a trade or business
- You are part of a partnership carrying on a trade or business
- You have a part-time business or are otherwise in business for yourself
Self-employed individuals are not regular employees of a company who receive a W-2. Instead, you’ll typically, though not always, receive 1099s from the clients you do business with that report your income. Income received through a third-party payment processor (such as PayPal or Upwork) may not generate a 1099 unless specific payment and transaction thresholds are met—but self-employed individuals must still report this income.
2. What is self-employment tax?
When you work for a company, taxes are withheld from your paycheck to cover Social Security and Medicare taxes. Further, an employer pays half of this burden. This doesn’t happen when you earn money on your own, so you’re required to pay the total self-employment tax to cover these obligations.
The self-employment tax rate is currently 15.3%, which consists of:
- 12.4% for Social Security
- 2.9% for Medicare
This tax is in addition to the income tax you pay on what you earned. Fortunately, you’re allowed to claim an income tax deduction for half the self-employment portion when filing a tax return.
3. Do I have to pay quarterly taxes?
Estimated quarterly taxes are something you need to become familiar with as a self-employed worker. Because you don’t have an employer making regular tax payments along with paychecks throughout the year, you have to pay them yourself.
They’re called “estimated taxes” because you can really only estimate what you’ll end up owing for a year. They are paid quarterly by the following dates:
- April 15
- June 15
- September 15
- January 15
These dates may vary slightly from year to year, so always check the IRS website. For instance, for 2022 taxes, the first payment is due on April 18, 2022, and the last on January 17, 2023.
If you earn money throughout the year from self-employment and fail to pay sufficient estimated taxes each quarter, you’ll incur a fee from the IRS.
4. How do I figure out how much to pay quarterly?
Estimated quarterly taxes are usually determined by last year’s income. But you can also estimate what you will make in a given year and must pay at least 90% of the actual, eventual total to avoid a penalty, though the IRS has lowered this threshold in some tax years. First, you’ll need to know your tax bracket for the applicable tax year, which tells you the percentage of income tax you pay plus the 15.3% self-employment tax.
So, say you bring in $80,000 in gross self-employment income, and you are a single filer. You would pay a 22% tax rate, totaling 37.3% for all your tax obligations for the year. So, on its face, you would then divide your expected income for the year by four and pay that percentage each quarter.
However, remember that you will have deductions to take that significantly lower your income. You’ll deduct all the business expenses you think you’ll have for the year from your total annual income and then also may take the standard deduction, which is $12,550 for single filers for 2021. So you end up paying a lot less in quarterly taxes after all these deductions since your income is substantially lower.
IRS Form 1040-ES helps calculate estimated quarterly taxes, so read through those instructions for a more detailed guide to calculations.
When you file an annual tax return, you’ll receive vouchers from the IRS with estimated payments you can make for the following year’s quarterly taxes based on your income from that year. Don’t forget to also pay quarterly taxes to your state, in addition to federal taxes.
5. How do I pay quarterly taxes?
Use Form 1040-ES to pay quarterly taxes. You can also pay them by sending your payment with the vouchers you received from the IRS.
The IRS also has an easy online system—the Electronic Federal Tax Payment System (EFTPS)—that allows individuals to pay quickly. And you can make a quick online payment using Direct Pay from your bank account.
6. Do I still have to file an annual tax return?
Yes! If the net earnings from self-employment activities were $400 or more, you’re required to file an income tax return. You will report all actual income based on the 1099s and other tax forms you receive as well as all of your business expenses. You’ll either have to pay additional tax based on how much you paid quarterly or get a refund if you overpaid.
7. Can I take the home office deduction?
If you use a portion of your home for your business, you may be able to take the home office deduction. You must use the space exclusively for the business and on a regular basis, and it must be your principal place of business. For 2021, the simplified deduction method involves calculating the square footage of your office and multiplying it by $5. The maximum allowed is 300 square feet.
8. What business expenses can I deduct?
According to the IRS, business expenses need to be “both ordinary and necessary” to qualify. This means they are common and accepted in your industry and are helpful and appropriate for your trade or business. The most common deductible business expenses are:
- Office supplies
- Home office
- Health insurance
- Automobile costs
- Loan interest
- Utility costs
- Startup costs
- Business insurance
- Self-employment taxes
- Continuing education
- And others
The qualified business income (QBI) deduction is a newer benefit that allows you to write off a portion of your business income. If your total taxable income is $164,900 or below for single filers, you may qualify for the 20% deduction in 2021.
Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.
New business owners have a lot of startup costs to worry about, from rent and payroll to advertising and research. Here’s what to know about deducting these expenses from your taxes.
- Understand fixed versus variable startup costs, like rent and utilities versus designing a logo or a down payment.
- Startup costs that qualify for a deduction include advertising, travel, employee compensation, professional fees, and more.
- You can deduct $5,000 in startup costs in the first year, as long as your total startup costs are $50,000 or under.
- Remaining startup costs can be amortized over a 15-year period.
- Use IRS Form 4562 for amortization reporting.
Starting a new venture, while thrilling, comes with a whole new set of financial burdens, stressors, and compliance considerations. The cost of starting up in the first year will vary significantly based on what you’re shooting for and your industry—estimates range from $3,000 to start a microbusiness to around $40,000 for a typical startup in actual expenses incurred.
But the good news is that you can deduct some of these startup costs on a tax return. The IRS outlines certain qualifying startup costs, including typical expenses paid for creating an active trade or business or researching one.
IRS jargon and guidelines can become confusing fast, and you have enough to worry about when you’re starting a new business. Here’s a breakdown of common expenses and categories for startups and what costs qualify for deductions.
Fixed versus variable startup costs
First, it’s helpful to understand the most common costs startup owners have to deal with, which can be broken down into fixed and variable expenses. Fixed startup costs are pretty much just like they sound—they’re static costs that don’t change much month to month. These include:
- Loan/debt payments
- Software and technology
- Office/operational costs
On the other hand, variable costs may be rare or fluctuate regularly. Variable costs may be:
- Design services for marketing materials, logo, and website
- Down payments on a mortgage
- Security deposits
- Costs of starting the business, like licenses and incorporation fees
- Office/location improvement expenses
Startup expenses will vary based on industry and other factors. For instance, retailers will have to worry about buying an effective point-of-sale system, whereas restaurant owners must pay for kitchen equipment, supplies, and food items.
What startup costs qualify for tax deductions?
Startup costs are any expenses incurred for the following:
- Starting an active trade or business, or
- Investigating the process of creating or acquiring an active trade or business
These expenses are experienced before a business starts accepting customers. The IRS specifies that for a startup cost to qualify for a deduction, it has to meet these two requirements:
- The cost is one a business could write off if they paid or incurred it to operate in an active trade or business that already exists in the same field the new startup is trying to be part of.
- The cost is one a business pays or incurs before the beginning date of their active trade or business.
Qualifying startup owners who pay for these expenses can deduct:
- Analyses or surveys of the market, products, labor supply, transportation facilities, or similar activities
- Ads related to starting the business
- Compensation to employees and instructors who are being trained/training employees
- Travel costs associated with getting customers, distributors, or suppliers
- Professional fees or salaries for executives, consultants, or similar professionals
What startup costs don’t qualify?
Fortunately, there’s a lot you can deduct as a startup. But not everything can be written off. Nonqualifying costs include:
- Research and experimental expenses (capital expenses that are “reasonable” expenses incurred related to business or trade activities that give you information that would “eliminate uncertainty about the development or improvement of a product”)
- Deductible interest
Recoverable startup costs for purchasing an active trade or business are only those associated with the preliminary investigation into the company—basically, how you decided whether or not you should buy the entity.
How to deduct startup costs
Business owners can deduct up to $5,000 in startup costs as long as the total is $50,000 or less. If you find that your expenses exceed this limit but are still $55,000 and under, you can still deduct some—the allowable deduction will just be lower. But startup costs won’t qualify for a deduction at all for the first year if expenses were more than $55,000. You’ll have to amortize all of them in the following years (more on that just below).
After the deduction, any costs remaining should be amortized in equal parts over the next 15 years. Amortization is how you can recover certain capital costs, similar to how depreciation works. You’ll use IRS Form 4562 to take the amortization write-off each year, which must be included with the business’s tax return.
What if you have questions?
Starting up a business means being inundated with new considerations, financial obligations, and priorities. Fortunately, the IRS allows owners to write off some steep costs in the first year and others over 15 years with amortization.
If you’re unsure which startup costs qualify and how to go about reporting everything correctly, it’s best to work with a tax professional. The team at Provident CPA and Business Advisors is here to advise you on the best way forward. We ensure you’re getting every single deduction and credit your business is eligible for.
Learn how we can help by contacting Provident today.
New business owners need to have the perfect balance between taking big risks that will pay off and being strategically cautious.
- Understand the major risk categories for businesses:
- Come to terms with some inevitable failures.
- Don’t underestimate the power of research!
Taking on any business venture involves some kind of risk. Entrepreneurs who think they can become insanely successful while only playing it safe still have a lot to learn. Yet big payoffs aren’t guaranteed when taking a significant risk—quite the opposite can and often does happen.
The most significant business risks include financial issues, competitive threats, and market and reputational risks. And any investor wants to see that a business owner has thought through these threats and has plans to avoid or deal with them.
How do you stay cautious and smart while still taking on exciting opportunities along the way? Here is a starter guide to managing business risk vs. reward.
1. Understand the categories of risk
First, all risks are not created equal. There are different levels and categories of business risk that you must identify and think through before balancing them vs. potential rewards. Here are some of the basics:
No one strategy perfectly fits with every type of company or industry. Part of the challenge is ensuring that your business plan is and stays relevant and up to date. What’s more, markets can change fast, putting you in a bind unless you’re willing to pivot strategy.
For new and old businesses alike, reputation matters to keep customers and score the new ones that enable growth. One small move can change perceptions for the better or worse. Any disappointment to a customer or prospect can impact a company’s reputation, leading to dramatic effects on the bottom line.
There are many financial risks involved in a new business. You have to weigh the pros and cons of having debt and applying for loans, putting work into finding investors, managing monthly cash flow, and investing money in the right business functions at the right time (like marketing versus hiring and recruitment). Often, financial risks are the most critical ones to any new or thinly capitalized venture.
One element related to financial risks is the need for growth. Owners have to make numerous decisions that could be hard now but will pay off big time in the future. You must carefully decide your approach—are you more concerned with short-term booms or playing it safe for a more certain long-term outcome? For example, if a business scales too fast, it may not deliver on promises to customers. At the same time, you also don’t want to risk competitors getting ahead of you while keeping your head down.
Markets fluctuate, sometimes in an instant. These shifts can be caused by changing consumer priorities and needs, economic upturns or downturns, new competitors, or “black swan events,” such as the recent pandemic. One product or service that’s hot this year may be old news in the next. A new competitor could come onto the scene with a lower price or a new technology.
Understanding the common and impactful risks and which ones may influence the bottom line is a crucial component of both starting and running a business. You can more successfully manage any threats by evaluating their likelihood and potential impact—and planning to address them proactively.
2. Come to terms with failure
Just because there is risk involved in a new venture doesn’t mean it’s not worthwhile. Even with the best plan and intentions possible, every business owner faces some level of peril. It’s impossible to avoid.
Because there’s no way to get around risk, it’s essential to embrace the fact that failure is likely going to happen—to some extent. The goal is simply to maintain those failures as temporary roadblocks, not catastrophes.
Nevertheless, many entrepreneurs plan as if they’ll never fail and are unpleasantly surprised when something goes wrong. It’s important to expect and prepare for mistakes—they’re going to happen. When you do run into a challenge, this point of view enables you to keep pushing through it. It also helps you recognize when something needs to change about your approach, which helps ensure a business (and its leaders) continues to grow.
3. Don’t underestimate the power of research!
The most effective way to avoid the biggest business risks is to have a plan. Push beyond the hypothetical and assess what would happen if a new strong competitor shows up or you experience a cash flow issue. How would you handle it? What steps would you take right away? What resources do you have to turn to in your network?
To create a plan that helps minimize or combat risks, plenty of research—and then some—is required. Pay close attention to who is leading your given market. What’s working for them and what isn’t? What are their biggest challenges at the moment?
Also, make sure to track consumer buying trends and customer preferences. For example, if you run a business where you meet with clients one-on-one, is it important to offer a virtual meeting option to stay competitive? It’s also valuable to survey target audiences. Ask them what’s most important to them right now and what they want to see from the businesses they support—including yours.
Every time a new opportunity presents itself, research it from every perspective. For example, if you’re considering making a new big purchase or investment, make sure to evaluate every option and think through the financial commitment. Sometimes, there’s a cheaper or better alternate route that will help minimize financial risk.
Finally, make sure to monitor and analyze the business’s track record. Implement processes for assessing vital operational and financial KPIs to see the rewards or setbacks you’re experiencing. This helps evaluate which risks to take on in the future and which to avoid based on experience.
Managed smartly, business risk is inevitable but valuable. After all, the reward side of the equation rarely exists without it.
Provident CPA and Business Advisors helps our clients pay the least amount of tax legally possible while assisting business owners as they implement comprehensive growth strategies. Contact our experienced team to learn more about our services.
Original works are automatically protected by copyright, but when would you need to copyright or trademark something explicitly? Here are some common FAQs!
- FAQs about copyrights:
- Can you copyright a business name and mottos? Brand names and logos would fall under the trademark umbrella.
- Can you copyright your website? Generally, you can’t explicitly copyright a whole website, but you can register individual works that appear within it.
- Can you place a copyright notice on an original website? Yes.
- When should you copyright something? Original works are automatically protected, but registering can provide additional intellectual property defenses.
- What’s the process for registering? You’ll need to submit an application, pay a fee, and provide a deposit copy of the work.
As a small business owner, you want to do everything possible to reduce liabilities and risks—but the world of intellectual property can quickly become confusing. Many entrepreneurs may wonder if they should copyright their content or business name to protect it from being used by others.
This guide briefly walks through common questions about copyrights and trademarks:
Can I copyright my business name and mottos?
First, it’s essential to understand the difference between a copyright and a trademark. A copyright protects original artistic works that have been fixed in a tangible medium, including a work of art, photograph, book, article, or song. A trademark, on the other hand, protects unique identifiers like slogans and brand names.
So, if you’re looking for protection for your business name, slogan, and even logo, you’ll need to look toward a trademark. You must use the item in a commercial setting to qualify for this protection.
For both copyrights and trademarks, it’s important to understand that you will have protection for your qualifying content automatically, even if you don’t officially register your work or brand. However, registering for copyright or trademark protection can give you more legal defenses should you need them.
Can I copyright my website?
Business owners typically don’t have to copyright their entire website. In fact, the United States Copyright Office states: “Although a website may contain text, artwork, photographs, music, videos, or other copyrightable content, the website itself is not typically considered a copyrightable work.”
However, sometimes the whole website or a page can be registered if it could be considered a compilation or collective work according to copyright guidelines.
You can copyright original content that appears on your website, including each image, video, and piece of text. You would register an original blog post, white paper, or article you produced, for example, as a literary work, and an illustration you created or photograph you took as visual artwork.
Other examples of copyrightable content include recordings, music, videos, images, and other audiovisual works.
However, uncopyrightable material associated with a website would be:
- Ideas and plans for future websites
- Functional design elements
- URLs and domain names
- Website layouts or formats
- Unoriginal material (names, icons, familiar symbols)
- Work that is in the public domain
Can I place a copyright notice on my original website?
You may have noticed that many websites include a copyright notice with the year at the bottom of every page. You can do this as soon as your website is live to remind visitors that they cannot reproduce the original website content elsewhere, and it costs nothing. The copyright symbol can be placed on any work you have created, regardless of whether it was registered with the Copyright Office.
Include the copyright symbol (©) or “Copyright,” followed by the current year and your company name.
When should I copyright something?
The next question you’re probably asking is, should you copyright?
Remember, anything original you create is automatically protected by copyright laws, even if you don’t register it officially. However, filing for copyright registration simply provides further protection, including increasing eligibility for statutory damages and providing concrete proof of ownership should you need it.
This is what the Copyright Office says about whether or not to register:
“Registration is recommended for a number of reasons. Many choose to register their works because they wish to have the facts of their copyright on the public record and have a certificate of registration. Registered works may be eligible for statutory damages and attorney’s fees in successful litigation. Finally, if registration occurs within five years of publication, it is considered prima facie evidence in a court of law.”
What’s the process for registering for copyright?
If you decide to register original works for copyright protection, there are three key elements to gather and submit:
- A completed application form
- A nonrefundable filing fee
- A deposit, which is a copy (or copies) of the work you’re registering
The application form will ask the author’s identity, the type of work registered for copyright, and the copyright owner. You’ll need to submit the above three items for each item you want to register with the US Copyright Office.
In the end, the decision to copyright material is an individual one, and some protections are automatic. But doing so may have some advantages should legal action become necessary. Be sure to contact a qualified business or IP attorney to review the options or assist with possible infringement.
The Entrepreneurial Operating System® (EOS®) is used by over 100,000 organizations to help them align around common goals and improve the business. These are some of the most important tools that make it work.
- EOS is a model built for busy entrepreneurs and centers around six key components:
- Five key EOS tools include:
- Vision/traction organization
- Accountability chart
- Meeting pulse
Implementing a quality business operating system can vastly improve processes, teams, and organizations. And the Entrepreneurial Operating System® (EOS®) is a model made for busy entrepreneurs looking to streamline and scale their businesses.
The system focuses on accountability for team members, aligning everyone around a shared vision, being very clear about roles and responsibilities, and tracking progress with measurable goals.
When you decide to use EOS, some key tools drive these results. Let’s dive deeper into what EOS is and the crucial components that make it effective.
What is EOS?
EOS is a system of concepts and tools that help businesses clarify, simplify, and achieve their vision. It was built for busy entrepreneurs and provides straightforward tools without complex theories or methodologies. And instead of addressing business issues temporarily, EOS focuses on finding root causes and changing the organization holistically.
The EOS model is used by over 100,000 organizations worldwide and is comprised of six key components:
- Vision: Every person who is part of the organization should be aligned on where the business is headed—and the steps needed on that journey.
- People: Business owners must hire, develop, and allocate the right people for specific roles.
- Data: Many parts of a business are objective, and companies must separate the facts from feelings, opinions, and egos.
- Issues: Every business will have problems, but are you solving them? You need to systematically address issues and their root causes to ensure they don’t return.
- Process: A business’s core processes must be identified, simplified, and documented.
- Traction: This is where a business gains momentum, and much of this traction depends on holding people accountable and ensuring actions are correctly executed.
When business owners feel stuck and unable to move forward, EOS helps them find actionable solutions to improve how the organization runs. The model is laser-focused on ensuring that everyone is on the same page and working toward the same goals.
5 crucial EOS tools
EOS should be implemented comprehensively, but there are some fundamental tools that help it achieve significant results. Here’s a look at five crucial ones:
- Scorecard: It’s not enough to track progress regularly; every person who is accountable for something must have measurable metrics tied to performance. It ensures everyone knows what is expected of them and helps precisely keep track of how things are going.
- Rocks: Rocks are your business’s top three to seven priorities for the next 90 days, as determined by leadership. These need to be shared with everyone, followed by each person developing one to seven individual rocks that reflect organizational or higher-leadership goals.
- The Vision/Traction Organizer (VTO): EOS’s VTO is a two-page guide that helps align the team around these eight questions:
- What are your core values?
- What is your core focus?
- What is your 10-year target?
- What is your marketing strategy?
- What is your three-year picture?
- What is your one-year plan?
- What are your rocks?
- What are your issues?
- Accountability chart: This helpful chart outlines the organizational structure. Every person can see their distinct roles and responsibilities, so there is no confusion and clear accountabilities.
- Meeting pulse: Effective meetings keep people productive and on the same page. EOS emphasizes the value of weekly Level 10 Meetings (which should be held on the same day and at the same time with the same agenda) and quarterly meetings. This format applies to every level or department within the organizational structure.
These are some of the essential components of the EOS model. Without accountability, regular meetings, priorities, a scoring mechanism, and a shared vision, it’s challenging to keep a team aligned and the business growing.
Getting help with EOS
EOS tools are proven to help business owners align teams around a common cause and systematize companies, and they work for businesses of any size. But sometimes, owners find it challenging to implement EOS while also participating in the process. This is where an outside perspective and guide can help.
The Provident CPA & Business Advisors team helps our clients implement EOS and all its vital tools. The first step in our EOS process is a complimentary 90-minute meeting with your business’s leadership so that everyone can learn more about the model.
Contact Provident CPA & Business Advisors to learn more.
IRS Form 8829 is where you can claim the regular home office deduction and calculate other expenses related to using a home for business.
- Form 8829, Expenses for Business Use of Your Home, allows you to calculate the percentage of your home used for business and other allowable related expenses.
- Taking the simplified home office deduction is much easier, but you won’t list actual expenses or take a home depreciation deduction.
Some taxpayers may report expenses related to using a home for their business on IRS Form 8829, leading to the home office deduction. These expenses may include maintenance costs paid in association with running a business from home, among others.
While the IRS set up another method for calculating these deductions—the simplified home office deduction—it’s still helpful to understand when you would need to use the form and how it allows you to calculate everything.
This guide walks through the Form 8829 basics, including the expenses and the eligibility requirements.
What is IRS Form 8829?
IRS Form 8829, Expenses for Business Use of Your Home, may be used to calculate allowable expenses related to using your home for business purposes. This form is what you use if you’re taking on the regular method of claiming the home office deduction.
Form 8829 is typically used by small business owners and self-employed taxpayers who work from home and run business operations there most or all of the time. You are allowed to deduct business expenses related to a part of your home only if it is exclusively used on a regular basis:
- As your principal place of business
- As a place of business used by customers, clients, or patients as part of the normal course of the business
- In connection with the business, if it is a separate, unattached structure from the home
Factors that qualify a home as a principal place of business include whether you use it exclusively and regularly for administrative or management activities and don’t have any other fixed location where you conduct these business activities. These guidelines also mean that if you use a workspace that also doubles as a bedroom, kitchen, living space, or another purpose, it does not qualify as exclusively used for the business.
According to the IRS Form 8829 instructions, you cannot use the form if you:
- Are a partner, or are claiming the expenses on Schedule F of Form 1040
- The business expenses are properly allocable to inventory costs (use Schedule C, Part III instead)
- You have elected to use the simplified method for the home for this tax year
Keep records like photos of the space and documentation of measurements, and make sure everything is dated for later reference. Sometimes a home’s real estate records will have accurate square footage that you can reference and save. These records can help in subsequent tax filings or if the IRS has any questions about Form 8829 calculations.
How to calculate using Form 8829
The first step when you’re ready to use Form 8829 is calculating the portion of the home used for business operations. In Part I, you provide the total area of the house and the area of the dedicated workspace or room and divide the work area by the home area. The form asks that you enter the result as a percentage.
So, for example, if the business space is 300 square feet and your home’s total area is 1,500 square feet, the office takes up 20% of the residence.
Part II figures out the allowable deduction. You’ll enter the Schedule C, line 29 amount plus “any gain derived from the business use of your home” and minus “any loss from the trade or business not derived from the business use of your home.” Then, report direct and indirect expenses, including casualty losses, deductible mortgage interest, and real estate taxes. Multiply the total by your home use percentage on line 7.
Next, you add up these direct and indirect expenses:
- Excess mortgage interest
- Excess real estate taxes
- Repairs and maintenance
Multiply the sum by line 7 again. You then calculate home depreciation in Part III and report carryover of unallowed expenses in Part IV. These last two sections are a bit more complicated. So, if you’re not using software, it’s a good idea to talk to a tax expert about the calculations.
What about the simplified home office deduction?
Because Form 8829 can get a bit complicated with expense and home-area calculations, many self-employed taxpayers decide to go with the simplified home office deduction. Just as with the regular deduction, the simplified version can only be claimed by workers who don’t receive a W-2 as a regular employee. You don’t have to own the home to qualify for the deduction (simple or regular).
The simplified option makes calculations and recordkeeping requirements far easier. It takes a standard deduction of $5 per square foot of your home with a maximum of 300 square feet, and eligible home-related itemized deductions are claimed on Schedule A. There isn’t a home depreciation deduction with this method.
So, while the simplified method is much easier for business owners, use the regular method if you’d rather enter actual expenses and deduct depreciation on the portion of the home used for business.
Working with a qualified CPA
If you’re self-employed or run your small business from home, there are numerous tax considerations to manage each year. Taking the home deduction and submitting the correct forms is just a portion of your obligations throughout the year, including paying estimated taxes and keeping proper records.
If you have questions, be sure to consult a qualified CPA with experience helping business owners develop effective tax strategies.
A business is driven by a set of workflows and actions that help define who you are, what you do, and how you do it.
- A core process is a detailed business function that keeps the business moving and aligns teams through shared steps and well-defined accountabilities.
- Identify and strengthen your core processes with these steps:
- Outline all business components
- Determine which processes impact the business the most
- Think about what makes you unique
- Identify overlaps and assumptions
- Consider which processes are and aren’t working
- Start simplifying
- Hold people accountable
- Take the customer’s perspective
One of the first things to do as a business owner is identify your “why”—the reason your business exists and why you think it’s important—and outline its core values. But once operations are running and you have a few employees, it’s also crucial to systematize and align how many tasks are carried out, which is the role played by core processes.
Outlining these processes and keeping them front and center can help you simplify workflows and outcomes. Let’s look at how to define, implement, and maintain core processes.
What is a core process?
Core processes may vary slightly from business to business. But typically involve the following business functions:
- Customer retention
Think of each of these areas as a critical driver for the business. For example, growth drivers have to do with attracting new customers via sales and marketing. Efficiency drivers are related to operational processes. And, of course, financial drivers are the processes you have in place to maintain cash flow and capital.
These areas are “core” to the success of the business—without them, you couldn’t find new customers or offer employees benefits or ensure the bills get paid each month. However, depending on the size of your business and industry, the exact core processes could look a little different.
Core processes are vital because everyone throughout the business needs to understand, use, and align with some standard ways of doing things. There will be far less confusion across departments. Team members should be able to define them, follow them, and know their purpose without much thought. Core processes also help business leaders assess which areas are falling short or need more resources, which also improves efficiency.
And outlining your core processes means you can also start improving and simplifying them, creating a more self-sustaining enterprise that is on track to grow.
How to identify and strengthen core processes
Here are some steps to get started:
Outline all business components
It’s often best to start by recording each key aspect of the business. This means thinking through every department and process that currently exists. Then, link whoever is involved with each process. For example, marketing is a key function; there is a process for recording and reporting on qualified leads; and the marketing manager is the essential owner, and the marketing team is the crucial user of this process.
Determine which processes impact the business the most
Critical drivers impact the business when something goes really wrong or really right, and core processes are intimately tied to them. So, which workflows have the most direct influence on the bottom line, for instance, or customer retention rate? These questions will lead you to the core processes.
Think about what makes you unique
While every business has some of the same components to make money, and companies within industries may share products or services, there’s a lot more to what you’ve created. What are your key differentiators in the market? Whatever makes the company unique—such as customer service, for example—has led to particular actions you take that other businesses don’t. These are probably core business processes and may also align with your core values and business vision.
Identify overlaps and assumptions
Once you start digging into each gear within the overall business machine, you may realize that you had false assumptions about a task, where it was being handled, or who was handling it. There could be some overlap—for instance, two “owners” tackling financial and operational tasks. The core process exercise reveals these mixed responsibilities, allowing the team to clarify them. Figuring out where assumptions are incorrect points the way to better solutions, including improved processes or entirely new ones.
Consider which processes are and aren’t working
Each core process has some desired outcome—whether it’s to get a certain number of leads with a marketing campaign or pay invoices faster. Where are these outcomes not being met? Where are goals being exceeded? What can you change about a process to improve things? This step leads to the next one …
Visibility is the first step to change. Now that you’ve looked at where things are being held up, you can start to smooth out the kinks. A great way to proceed is by assessing whether the best tools are being used to complete a process. Is there a more efficient way to do it? Is a 12-step process better as a three-step one? Are the steps—such as contacting a specific individual—correct? Have you incorporated automation when possible?
In general, the simpler the process, to the extent it’s practical, the more effective, accepted, and useful it will be.
Hold people accountable
Remember that people are involved in each process, and they should be held accountable when specified steps aren’t followed or effective. Identify the person behind each action you’re looking at to uncover areas that require additional training, opportunities for support, or better processes. Getting team members aligned on core processes and desired outcomes increases engagement and efficiency.
Take the customer’s perspective
Another vital step is considering what your customers think. Even if a process is the most efficient it can be, that alone doesn’t mean it’s working for your customers. Make sure that simplifying processes takes their perspective and the impact on them into account, prioritizing their wants and needs.
How EOS® can help your business
Core processes keep everything running smoothly and ensure a business gains Traction. Identifying these crucial elements is a part of the Entrepreneurial Operating System® (EOS), which helps business owners clarify, simplify, and achieve their vision.
Provident CPA and Business Advisors helps our clients implement this system to strengthen their companies and hit their goals. To learn more about our business advisory services, contact us today.
Self-employed individuals own their businesses, but not all business owners are self-employed. Here are the essential differences.
- Business ownership can look a few different ways. For instance, business owners can hire other people to work for them or be sole proprietors.
- Self-employed individuals work for themselves and include independent contractors, partners, sole proprietors, and members of an LLC.
- The key differences have to do with the type of business, the way it’s taxed, whether there are other employees, how owners get paid, and other factors.
The surge of the gig economy has made freelancing or starting up a business more common and desirable. Pew Research reports that about 16 million US workers identify as self-employed today. This means, according to the IRS’s definition of self-employed individuals, that any of the following conditions apply to them:
- They carry on a trade or business as a sole proprietor or independent contractor
- They are a member of a partnership that carries on a trade or business
- They are otherwise in business for themselves, including a part-time business
Nevertheless, many people confuse self-employment with business ownership. They may assume that any kind of business owner is self-employed because they started or still run the business. But are they always considered self-employed? What about shareholders of corporations?
Here’s a guide to distinguishing these classifications:
What is business ownership?
Business ownership can look a few different ways. For example, a sole proprietor or freelancer technically owns their business, as does a shareholder who owns a stake in a company. A business owner may have founded the business and still manages day-to-day operations, or they may be removed from it completely. Entrepreneurs may also hire employees and contractors to work for the entity.
Owners get paid either by taking draws or distributive shares. A draw is taken from the business and put into a personal account, which is how a sole proprietor gets paid. A distributive share is money that partners earn in the form of shares, which is outlined in partnership or operating agreements. Dividends are funds received by corporate shareholders, determined by the business’s board of directors.
Business ownership and its different varieties are closely connected with how the entity will pay taxes, so the IRS rules essentially determine ownership types. For example, a sole proprietor and LLC owner will pay self-employment taxes, but not S corporation owners or corporate shareholders.
What is self-employment?
Someone who is self-employed doesn’t work for one employer who compensates them with a regular salary or wage like a traditional W-2 employee. Instead, self-employed workers are often freelancers (or independent contractors) who individually and directly contract with a company (or companies) to provide a service.
Self-employed individuals don’t have access to employer-sponsored benefits like paid time off or health insurance plans, and tax isn’t withheld from their earnings. They have to manage all these moving parts independently and are responsible for paying their taxes every quarter.
However, independent contractors can generally set their own schedule and decide what clients to work with or projects to take on, allowing for immense flexibility. Self-employed individuals may be independent contractors, sole proprietors, owners of an LLC, or members of a partnership.
Key differences between owners and the self-employed
Any self-employed person also owns their business. But, you can’t turn it the other way—not all business owners are self-employed. Self-employed workers both own their companies and are usually the only ones managing operations. But corporate shareholders, for example, often don’t have that kind of personal involvement in everyday business concerns.
Another way to define a self-employed worker versus a business owner is to determine how each of them gets paid. Typically, a self-employed individual will earn money from work they’re actively doing. In contrast, a business owner can make money from a larger system or company they bought into or created.
Independent contractors, sole proprietors, and single-member LLCs are self-employed, but many large shareholders of corporations are not. This is why S corporation owners don’t pay self-employment tax on business earnings.
Again, taxes are impacted significantly by the type of business someone decides to create. For example, sole proprietors, LLCs, and partnerships have pass-through taxation, meaning the entity itself isn’t taxed, and income is reported on owners’ individual tax returns. And owners still have to factor in self-employment taxes.
Corporations can get into a situation of double taxation, where the entity has to pay income taxes on profits, and then the shareholders have to pay taxes on dividends received. But opting to become an S corporation can help avoid double taxation while maintaining the owners’ separation from the company from a liability standpoint.
Questions about business ownership?
If all of this sounds complex, it can be. If you own a business, it isn’t always easy to understand how the different structures will impact your taxes. But tax professionals can guide you through the pros and cons, helping you find the option that meets your goals.
Provident CPA and Business Advisors assists our clients with minimizing taxes and business planning. Contact us today to learn more.