Whether you do your own taxes or hire a professional, you need to understand what tax deductions and credits you may qualify for as a small business owner. If you can familiarize yourself with what you can deduct and have a general understanding of how the deduction calculations work, you’ll be able to maximize your tax refund.
Using tax software like TurboTax will make tax time a breeze. You don’t need an accounting degree to use the program, and with TurboTax, you can be sure that you will get all of the tax deductions and credits that you qualify for. Take TurboTax for a test drive by signing up for a free trial.
Here are the 4 steps that you can implement immediately to maximize your tax refund:
1. Find All Possible Tax Deductions
As you probably already know, many business expenses can be deducted from your income. This helps you save money when it comes time for taxes since less income means less money that you have to pay taxes on. What you may not have known, however, is the sheer number of possible deductions that you may qualify for and how to calculate those deductions.
We recommend you keep track of your business income and expenses with QuickBooks Online. By maintaining accurate records throughout the year, you will save yourself time and money at tax time by ensuring you take advantage from all the deductions you’re eligible for. Plans start at just $15 a month and you can try it before you buy it with a free 30-day trial
General Business Expense Deductions
Believe it or not, the IRS does not have a master list of everything a business can deduct. Instead, the IRS simply defines a business expense as anything that incurs a “cost of carrying on a trade or business.” This includes things like the following:
- Wages, Salaries, Bonuses, Commissions
- Property Rental or Mortgage Payments
- Utilities
- Office Supplies
- Furniture/Equipment
- Software
- Advertising Costs
- Employee Health Insurance Premiums
As we said above, anything that incurs a “cost of carrying on a trade or business” can qualify as a business expense. The only other requirements are that these costs are “ordinary and necessary.” As the IRS states, “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
Meals & Entertainment Deduction
50% of the cost of meals and entertainment can be deducted, provided that the event is associated with the business and entertainment takes place immediately before or after a business discussion. Some examples include catered meals at your office or a round of golf with a client. For more information, you can read our ultimate guide on deducting meals and entertainment expenses.
Business Books & Learning Materials
A business owner can deduct expenses related to books, magazines and educational programs that help you run your business.
Interest & Fees on Business Credit Cards & Loans
Interest that you incur on business credit cards is tax deductible. In addition, fees that you incur on business loans such as interest, origination fees, broker fees and maintenance fees are also all tax deductible. However, down payments for business loans are not tax deductible.
Startup Costs
Business expenses only exist while your business is up and running. Before that, while you’re still launching, any costs are considered “capital expenses” or startup costs, and you can deduct up to $5,000 the first year you’re in business. To learn additional ways to save on your taxes, including qualifying startup costs, check out our top 21 business tax saving tips.
Home Office & Auto Expense Deductions
While the above expenses are generally easy to understand and deduct, there are a few other deductions that are a bit more complex. In particular, the home office deduction and the auto expense deduction.
The IRS gives you two ways to calculate these deductions: a Standard Method, which can usually be done in a couple minutes, and an Actual Method, which requires digging up lots of receipts and bills. We recommend you try both methods and use the one that gives you the largest tax deduction:
Auto Expense Deduction
If you’ve racked up a lot of miles driving to meet clients or to attend conferences AND training courses, you can deduct these costs. However, this does not include your commute to and from work. When calculating your auto expense deduction, you can do it in one of two ways:
- Standard Method: 53.5 cents per business mile, plus fees for tolls and parking.
- Actual Method: Add up all your actual auto expenses (gas, repairs, oil change, car insurance, car washes, etc.) and then multiply it by the percentage of miles used for your business, which is equal to your business miles divided by your total miles for the year.
For more information, you can read our guide on the auto expense deduction.
Home Office Deduction
If there’s an area of your home that is used exclusively and regularly for business, you can deduct certain expenses pertaining to that space.
- Standard Method: $5 per square foot (max. 300 square feet, or $1,500).
- Actual Method: Add up all home expenses (rent, mortgage, insurance, utilities, repairs, depreciation) and then multiply it by your home office percentage, which is your home office square footage divided by your total home square footage.
For more information, you can read our guide on the home office deduction.
2. Find All Possible Business Tax Credits
A lot of businesses qualify for tax credits without them even knowing it. If you set up a retirement plan, made your business more accessible to the handicapped, or hired a veteran in the last year, you could save a hefty sum on taxes due to qualifying tax credits.
Tax credits are used by the IRS to give businesses an incentive to complete certain objectives, like hiring disadvantaged workers or installing an energy-friendly system. Unlike a tax deduction which reduces the amount of taxable income you claim by subtracting business expenses, tax credits directly reduce how much you owe.
Common Business Tax Credits for 2018
| Business Tax Credit | |||
|---|---|---|---|
| Work Opportunity Credit (WOTC) | food stamp recipient or ex-felon. | ||
| Small Employer Pension Plan | costs, not to exceed $500 per year. | ||
| Disabled Access | barriers or installed fixtures to make your workplace more accessible. | for the upgrades; not to exceed $10,000 per year. | |
| Employer-Provided Childcare Facilities/Svcs | facility to provide services to employees. | childcare expenses, not to exceed $150k per year. | |
| Plug-in Electric Drive Vehicle | that draw energy from a battery and were purchased after 12/31/2009. |
How to Claim Business Tax Credits
In order to claim a tax credit, you need to submit the forms listed in the table above along with your tax return. In addition to the 5 tax credit forms listed above, you may also need to file IRS Form 3800. You can find instructions for each form along with the qualifications that must be met on the IRS website.
3. Keep an Eye on Your Tax Bracket
This tip applies mostly to businesses who undergo lengthy and expensive projects for their clients. such as architects, engineers, graphic designers, lawyers, contractors, consultants, etc. For such businesses, it’s not uncommon to experience an income spike when, say, 3 major projects all wrap up in the same year. This can put your business in a higher tax bracket than normal, which means you’ll have a higher tax liability for that year.
Instead, consider taking a progressive billing approach by billing your customer in “stages.” For example, stage 1 could be a 50% deposit before you begin work. Stage 2 could be to bill the customer for 25% of the project when it is half complete, and then the final bill would be for the remaining 25% upon completion of the project.
QuickBooks Online allows you to easily bill customers in stages, similar to what I have described. You can even run reports to see how much of a project has been billed vs. unbilled.
4. Take Advantage of Tax Software
Tax preparation software like TurboTax is a great way to maximize your small business tax refund for a number of reasons. First, it finds deductions for you automatically, helping you save the most money on taxes. Second, it fills out all the necessary forms, and third, it provides you with audit protection in the event your tax deductions are audited.
While there’s a few different tax preparation software out there – including H&R Block and TaxACT – we recommend TurboTax because of their ability to find the most deductions. Multiple reviewers and tax professionals compared the programs and found that TurboTax produced them the largest return.
For more information, read our full comparison of tax preparation programs.
How to Select the Right TurboTax Software
The edition of TurboTax you need depends on your business entity and whether or not you need to issue W2 forms to employees or 1099 forms to contractors. TurboTax Self-Employed and TurboTax Home & Business are both priced at $119.99. However, with Home & Business you can prepare W2 forms and 1099’s whereas with Self-Employed you can’t.
If you are an S-Corp, C-Corp or Multi-member LLC, then your only option is to use TurboTax Business, which is $169.99. Below you will find a summary of all 3 options along with pricing and other pertinent info.
TurboTax Software Options for Small Businesses
| Edition | |||
|---|---|---|---|
| Who it’s Right For | |||
| Cost (2017 editions) | |||
| What’s Included | |||
| Import data from QuickBooks or Quicken |
How to Use TurboTax Self-Employed in 8 Easy Steps
TurboTax works by asking you a series of questions about your business and personal finances. Based on your responses, the system fills out your tax forms automatically. This is the case for all 3 TurboTax options. However, the specific questions and user experience may be different, depending on which option you choose.
For a better general understanding, here are the 8 steps needed to complete your tax return for TurboTax Self-Employed:
1. Enter Your Personal Information
The “interview” process begins with personal info about you and your family. If you used TurboTax last year, you can import this data and save yourself some time. Also, note that you don’t have to answer every question in one sitting; the program will save what you have entered so far and then you can pick up right where you left off instead of starting over each time.
2. Enter Your Business Information
Before you dive into the business menu, make sure you have all the records you’ll need to complete this section. Below is a list of some of the key documents you should have handy:
- Last Year’s Business Tax Return
- Profit and Loss Report as of 12/31/XX
- Payroll Reports
- Vehicle information (miles driven for business and personal)
Intuit has a comprehensive checklist consisting of all of the documents you will need to complete your tax return. After entering some basic info about the type of self-employment work that you do, you will see an interview question similar to the one below:
3. Enter Your Self-Employment or Business Income
After responding “Yes” to this question, you will enter your income, either from your Profit and Loss statement and/or from 1099-MISC forms sent by your clients with whom you did work for throughout the year.
4. Enter Your Self-Employment or Business Expenses
Once you have entered all of your income, the next step is to enter all of your business expenses. TurboTax will provide you with the most common expense categories (i.e. Supplies, Advertising, Business Insurance) as indicated below. You can also add any categories that you need to.
5. Review Income and Expenses
After entering all income and expenses, you will see a summary of what you have entered. Be sure to review this info to ensure that it is accurate before moving on.
As you enter this information, TurboTax will immediately begin searching for any deductions/credits that you may be eligible for. In the upper left-hand corner, you’ll see your federal & state refund (or liability) amount. These values get updated automatically as you complete each step.
6. Fix Errors, If Any
When you finish your federal return, the system will run an error check. If there is anything missing or incorrect, you’ll be directed specifically to those places. As indicated in the screenshot below, TurboTax will explain what the errors are (i.e., missing birthdate(s), missing social security numbers) so you know exactly what you need to fix.
7. Submit Your Return
If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming and (in most cases) New Hampshire and Tennessee, you can proceed to file your tax return. However, if you don’t live in one of these states, you’ll need to complete your state tax return next.
8. Filing State Tax Return
To save you time, TurboTax automatically copies all the relevant information from your federal tax return to your state tax return. However, you may need to input some additional information, as per your state’s unique requirements. Once complete, you’ll run a final “master check” over both your state and federal forms – then you’re good to click submit!
Frequently Asked Questions (FAQs) About Tax Refunds
1. Do Small Businesses Get Tax Refunds?
Yes they do. As a matter of fact, small businesses may qualify for a refund more often than individual taxpayers. This is primarily due to the fact that as a small business, you may qualify to take deductions that are not available to an individual. For example, meals & entertainment, home office deductions and vehicle deductions to name a few.
2. Do Small Business Owners Get Tax Refunds?
Yes they do. However, this largely depends on your individual situation as well as your business structure. For example, sole proprietors, partnerships, or LLCs are typically “pass-through” entities, and you’ll usually need to pay more than your estimated quarterly taxes in order for a refund.
If you pay yourself a salary, as is the case with C-corps and S-corps, you might also receive a tax refund. However, any profit distributions in this scenario might cause you to owe money at the end of the year, assuming you don’t take taxes out immediately or pay estimated quarterly taxes.
3. Do Deductions Increase Refunds?
Not necessarily. Deductions can reduce your overall taxable income. A lower taxable income can result in a lower tax bill or even a refund. If the amount of estimated taxes you have paid exceed the amount of taxes owed (based on your taxable income) then it will result in a refund.
4. What is the Maximum Tax Refund You Can Get?
It depends. There are a number of factors that determine whether or not you will receive a tax refund or maximize your tax refund. We have discussed a few of them in this article. Below is a list of the key components that go into calculating your tax bill or refund:
- Business Deductions
- Business Credits
- Filing Status
- Tax Bracket
- Withholding
- Exemptions/Adjustments
The Bottom Line – Maximize Your Tax Refund
Now that you are familiar with the tax deductions and credits that your business may qualify for, you may want to consider using an accounting software like QuickBooks Self-Employed (QBSE). You can easily track your income and expenses throughout the year in QBSE, and it allows you to easily transfer your data to TurboTax so that you don’t have to manually enter it.
This makes using tax software like TurboTax even easier, helping you qualify for your maximum deduction. You can take TurboTax for a test run by signing up for a free trial.
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