Tax season is around the corner and whether you’re filing as an LLC or S Corp, you want to get the most savings possible. To figure out the best ways to save in 2015, we asked accountants and finance experts for their best small business tax tips. Here’s what we found:
Before we dive into the details on this topic, we also suggest you check out our recommended accounting software, Quickbooks Online. Visit Quickbooks to see why over 1 Million small businesses use Quickbooks for their accounting software.
Tip #1: Get the most out of your auto/gas deduction
The government lets you deduct business-related car expenses, which you can calculate using two different methods. Try both of them and see which one gives you a larger deduction:
- Standard Method: in 2015 it is 57.5 cents per business mile plus tolls and parking (up from 56 cents per mile in 2014)
- Actual Method: add up all actual automobile expenses – including gas, repairs, oil change, car insurance, car washes, etc. – and then multiply it by your business percentage (business miles/total miles for the year).
Note: Your commute from home to work is not deductible. But once you get to your office, traveling to a client counts as deductible business miles. Traveling back from the client to your office is deductible, but then from your office to home is “commuting” and is not deductible.
Self-employed taxpayers should diligently ask for and save all receipts related to legitimate business expenses. This includes taxi rides, meals, gifts, and entertainment. For every expense, there should be either a paper or digital record of the transaction. Having a separate company credit card where all business expenses are charged is an excellent way to keep track of daily expenses.
If you tend to mix business trips with leisure, you might wonder which items are safe to deduct and which are not. In this scenario, it’s always best to err on the side of caution in order to safeguard against a potential future audit. Travel expenses like plane tickets would likely not be questioned by an auditor if the purpose of the trip was to attend a meeting or convention related to your industry and profession. However, certain other expenses such as a day trip to Disney, may not be considered an “ordinary” and “necessary” business expense by the IRS.
Also check out the Fit Small Business guide to keeping records for tax time.
Many of the tax credits for small businesses that were set to expire were recently extended by Congress, such as the Work Opportunity tax credit and the New Markets tax credit.
The Work Opportunity tax credit can be claimed by business owners who hire individuals from groups that face high unemployment, such as veterans. The New Markets Tax Credit Program provides an incentive for business owners to open up in low-income communities. Up to 39% of your initial investment can claimed in tax credits over 7 years.
While the idea isn’t new or novel for 2015, I find myself having this discussion over and over each year. Hiring your children is one of the easiest ways to reduce self employment income while at the same time helping your children prepare for their own future.
The money the child earns can be placed into a Roth IRA tax free. If you or I place money into a Roth IRA, we have to use “after tax dollars.” However, if your child earns $6,200 or less, their tax rate will be 0%, so the full amount can go into the Roth account. This money can later be used to pay for college or a first home.
Any money placed into the Roth can always be pulled out and used for any reason. There will be taxes and possible penalties if you pull the earnings from a Roth IRA before age 59 ½, but the penalty can be waived in certain cases (including, if done correctly, college education or purchase of a first time home).
Businesses should consider accelerating income from 2015 to 2014 where doing so will prevent the business from moving into a higher bracket next year. Conversely, you should consider deferring income until 2015 where doing so will prevent movement into a higher bracket this year.
Click here to check out the tax rates for 2014-2015.
If you purchased any energy-friendly systems, you may qualify for business energy investment tax credits, which are set to expire at the end of 2016. With the tax credit, you can save up to 30% of the cost of solar, fuel cells, small wind and PTC-eligible technologies or 10% the cost of geothermal, microturbines and combined heat and power (CHP).
Also, if you own or rent a commercial space, you can also receive a tax credit for reducing your energy usage under section 179D. If you can reduce energy and power costs by 16⅔ percent, you can deduct $0.60 per square foot of building floor area. If you reduce energy by at least 50 percent, you can deduct as much as $1.80 per square foot.
If you use a home office consider using the simplified deduction method: $5 per square feet of area used exclusively for business (300 square feet maximum). The standard method requires you to keep track of utilities, maitenance, mortage interest or rent and deduct the business percentage (total square footage of home divided by square footage of office) on your Schedule C, which you may not have readily available.
Also check out the Fit Small Business guide to the Home Office Tax Deduction.
If you report your income and expense on Sch C of Form 1040 and revenue is in excess of $500,000, I would recommend you form an S corporation to report your business activity. You will need to pay yourself reasonable W2 wages as the business owner, the rest of the income will flow through to your personal 1040, and will not be subject to self-employment tax, versus all of your net profit on a Sch C Form 1040 is subject to self-employment tax.
There’s still time to save for retirement and lessen your taxable income this year. You have until April 15, 2015 to contribute to your 401(k) or individual retirement account (IRA) for the 2014 calendar year. You’ll be able to ease your tax burden by adding to your retirement accounts, because both 401(k)’s and IRA’s are tax deferrable until you start withdrawing from them, which you can do without penalty starting when you’re 59 ½ years old.
You can contribute a maximum of $17,500 ($23,000 if you’re 50 or older) to 401(k) plans and $5,500 ($6,500 if you’re 50 or older) to an IRA for the 2014 tax year. For example, if you earn $60,000 a year and contribute the full $17,500 to your 401(k), your taxable income would drop to $42,500 (excluding other deductions or tax credits).
Also check out our Fit Small Business guide to Small Business Retirement Plans.
These accounts fly under the radar for many small business owners. They shouldn’t. Contributions to an HSA are tax deductible and there are no income limits for making a contribution like there can be for IRAs. If an individual or family is covered under what is considered a high-deductible health plan by the IRS then contributions up to $3,350 (single) and $6,650 (family) can be made on a tax deductible basis in 2015.. What’s more is that even if in the future the business owner is not covered under a high deductible health plan, funds from the HSA can be used to pay for qualified health expenses. Those qualified distributions from the HSA are not taxed, not even the earnings. Many HSA custodians also give account owners the option to invest their HSA dollars making the account a long-term growth asset to cover eventual health care expenses in the future.
This isn’t a fit for everyone, but for those covered under a high-deductible health plan, looking for a tax deduction and a great way to cover long-term health expenses in the future, it’s a great option.
Now that you’ve read some pro tax-saving tips, be sure to check out our guide to the Best Tax Software Provider – TurboTax vs. H&R Block.