Tax time tends to be one of the most stressful times of the year for most small business owners. This is largely due to the fact that instead of preparing throughout the year for tax season, we tend to wait until the last minute sort of like cramming for an exam. Implementing some of the tips that we have shared with you below will not only reduce your stress but also save you time and money.
Business Tax Prep Tips
Tip #1: Use a payroll tax software to avoid costly IRS penalties
Did you know that approximately one-third of all companies get fined each year for incorrectly handling payroll taxes? This is due in large part to the fact that around 40% of businesses with employees try to handle payroll on their own, using paper or spreadsheets, without the assistance of a third party.
Don’t get caught in this trap–We recommend Gusto for all your payroll handling needs. They will automatically calculate, deposit, and file your payroll taxes for you–and their US-based customer support means that help is easy to find when you need it. Sign up for a free trial today!
Tip #2: Keep business and personal finances separate.
A common mistake of small business owners is to commingle business and personal funds. It’s important to have a separate bank and credit card account for your business. This will make things a lot easier when it comes to managing your books and getting things organized for tax time. If you are ever audited by the IRS you want to make sure that you can produce documents that support legitimate business expenses.
Tip #3: Get organized.
One of the primary reasons people dread tax time is because they are not prepared. By implementing just a few things into your daily, weekly, or monthly routine you can remove the stress that tax season can bring on. Here are a couple of recommendations to get you started:
Set up a filing system to keep all of the paperwork you accumulate in one place.
Purchase a dozen expandable folders so that you have one for each month. Label each folder with one of the 12 months and file all receipts, deposit slips, ATM withdrawal slips, etc. into their respective folders.
Block out a couple hours each month on your calendar.
If it isn’t on your calendar, most likely it will not get done. However, if you set aside just a few hours each month to organize all of the paperwork in the folder, you won’t have to do 12 months at one time. During this time, you want to reconcile your bank and credit card accounts by matching up your receipts with the statements received from your bank.
Tip #4: Use accounting software like QuickBooks Online to track revenue and expenses throughout the year.
An accounting software program makes tax time a breeze. Once you have updated the program with all of your business revenue and expenses, you can quickly create financial statements in just a few minutes to send to your CPA or tax professional so they can file your tax return. If you use QuickBooks Online, you can set your tax preparer up with a user id and password so that they can access QuickBooks and run reports instead of you having to do it.
Business Tax Deductions
Business expenses are the cost of carrying on a business. A business expense is considered to be tax deductible if it is ordinary and necessary. The IRS defines ordinary and necessary as follows:
- Ordinary expense – one that is common and accepted in your trade or business.
- Necessary expense – one that is helpful and appropriate for your trade or business.
Here are some of the most common deductions available to small business owners. You can deduct other ordinary and necessary expenses as well.
Tip #5: Take the home office deduction.
If you use part of your home for your business, you may be able to deduct a portion of expenses, like your mortgage interest, insurance, and utilities. This deduction is for homeowners and renters. Click here to visit IRS.gov, and find out if you meet the requirements to take this deduction.
Tip #6: Take the auto expense deduction.
If you use your car in your business, you can deduct car expenses. You can choose one of the following methods for this deduction:
1. Standard mileage rate
For this method, you would multiply the total miles driven for business by the standard mileage rate for the year. For 2016, the standard mileage rate is 54 cents.
2. Actual car expenses
you can deduct actual car expenses like gas, repairs and insurance. However, if you use the car for personal and business then you will need to calculate the percentage that the vehicle was used for business purposes first and then apply that percentage to the total car expenses. For example, if you drove your car a total of 15,000 miles and based on your mileage tracker 6,000 of those miles were for business then you would divide 6000/15000 which equals 40%. Therefore, you can deduct 40% of your total car expenses as a business deduction.
If you want to take an auto deduction for a car that you lease, click here to see what the requirements are to do so.
Tip #7: Do lunch.
You can deduct 50% of meals that are considered business-related. This includes taking a client or even a potential client out to lunch. It could also include ordering pizza for the office as a special treat for your employees. Just make sure that these meals are not lavish or extravagant. A good rule of thumb is to treat your business finances as if they were your personal funds. Don’t dine at that new restaurant or play a round of golf at that country club just because you can write off half of the cost. However, if those are places that you wouldn’t hesitate to spend your own personal money then you should be ok to take the deduction.
Tip #8: Use independent contractors instead of employees.
Most business owners when starting out cannot afford to hire employees because they have to pay payroll taxes and provide other benefits. By hiring an independent contractor, you do not have to pay benefits or payroll taxes. However, make sure that you understand the difference between an employee and an independent contractor. If your independent contractor meets the legal definition of an employee, you could face penalties. Refer to the Hire a Contractor or Employee article posted by the Small Business Administration to learn more.
Tip #9: Take the Section 179 deduction.
This deduction allows you to recover the full cost of equipment or property up to $500,000 that you purchased for your business in the same year that you purchased it. This beats recovering the cost over a period of time like 5 or 10 years through depreciation deductions. Check out our Section 179 calculator to find out how much you can save.
Tip #10: Consider setting up a retirement plan.
A retirement plan can provide several benefits for you, your business, and your employees. Below are just a few of the benefits:
- Employer contributions are tax-deductible
- Assets in the plan grow tax-free
- You are able to attract and retain better employees
Business Structure Tips
Tip #11: Choose the right business structure.
How your business is structured can have a significant impact on the taxes that you pay. Read our article to learn more about the types of business structures and how to choose.
Filing Your Business Taxes
Tip #12: E-file your tax returns.
To have the confidence that your tax return is received on time, you should file electronically. Most tax software programs like TurboTax allow you to e-file your federal tax return for free. If you need to file a state tax return, you can easily do that with TurboTax for an additional fee. When you e-file, you receive a confirmation # once the IRS has successfully received your tax return. This is a much better alternative than dropping your return in the mail and wondering when or if it will be received. If you are expecting a refund, chances are an electronic tax return will be processed much faster than one received via snail mail.
Tip #13: File on time.
Do your best to file your tax return on time. If you fail to file your tax return on time and pay any taxes that are owed, in addition to interest, you will be assessed the following penalties:
- Failure to file on time – The minimum penalty for certain tax returns filed 60 days late or more increased recently from $135 to $205.
- Failure to pay on time – This is based on the amount of tax you owe and it will continue to accrue until the tax bill is paid in full.
If you are able to file your tax return on time but you do not have the money to pay your tax bill on time, go ahead and file the return. By filing the return, you can at least avoid the failure to file a tax return penalty. There are several programs that exist to provide small businesses with tax relief. Check out 10 tips from the IRS for taxpayers who owe money to learn what your options are.
Tip #14: Take responsibility.
If you do hire a CPA or tax professional to prepare your tax return, have them go over the return with you. Make sure that you understand and agree with the information they are reporting. Your signature at the bottom return means that you agreed 100% with what is being reported about your business. At the end of the day, the IRS will hold you (not the tax preparer) responsible.
Tip #15: Check out the IRS video portal.
You will find a section dedicated to small businesses. This library includes over a dozen videos, including topics such as:
- Business Expenses
- Business Income
- Small Business Taxes: The Virtual Workshop
- Starting a Business
Tip #16: Take Advantage of Bonus Depreciation
Lee Reams II, CEO, TaxBuzz
The Path Act extended bonus depreciation through 2019. This allows first-year depreciation of 50% of the cost of qualifying business assets placed in service through 2017. Please note: at the end of 2017, this special bonus depreciation will be phased out. The depreciation will go down to 40% in 2018 and 30% in 2019. After 2019 the bonus depreciation will no longer apply.
Tip #17: Consider Using a Tax Professional
Isaac M. O’Bannon, Managing Editor, CPA Practice Advisor
Even if you think you can manage preparing your taxes on your own using one of the do-it-yourself online programs, a CPA, Enrolled Agent or other tax professional is usually more affordable than you think. An experienced tax professional has seen everything and knows how to get you the most favorable tax deductions and benefits. This usually saves the taxpayer or business at least as much as the fee the tax pro charges, plus you get the added benefit of being sure that your returns were prepared and filed properly.
Tip #18: Keep Good Records
Kathy Dise, President, BudgetEase
Keep good records during the year so at the end of the year you can make informed tax management decisions. To make sure your financial information is correct reconcile all your bank and credit cards each month. When done make sure you don’t have any uncleared items or undeposited funds.
Tip #19: Donate Unused Inventory
Rob Webber, CEO, MoneySavingPro
If you have unsold or unused inventory, donate it and get the tax deductions instead of spending cash on storing it. Company donations of money, supplies, and property are all considered deductible expenses. Be aware that donations of goods greater than $500 have stricter reporting rules.
Tip #20: Track Your Mileage
John R. Dundon II, President, Taxpayer Advocacy Services, Inc.
Auto expense deduction covers more than just business miles. You can deduct mileage driven for medical purposes as well as miles driven for charitable purposes. It is always important to track your mileage for both business and personal purposes as a LOT of personal miles can be deducted.
Tip #21: Forecast Cash Flow
Blaine Bertsch, CEO, Dryrun.com
Build a cash flow forecast to estimate your tax impact and prepare for your payments. Modelling out the flow of your receivables and payables alongside your budget and sales pipeline will not only help you at tax time, but forecasting all of those key factors in your cash flow will help you thrive and grow your business year on year.
Over To You
Now that we have shared some of our tax saving tips with you, what are some of your favorite tax savings tips? Use the comment box below to share those with us. We would love to hear from you! And be sure to visit Gusto, our recommended payroll tax software.