Owning a small business owner is expensive. Every dime counts when entrepreneurs are living on thin margins. But owning and operating a small business is even more expensive when you pay more taxes than you really owe.
In a survey personal finance expert Garrett Gunderson conducted of his small business-owner clients, approximately 93 percent of them had overpaid over the past dozen years. Now, nobody expects owners to be tax professionals — you do have businesses to run, after all — but it’s important to know where you can save money in order to invest that money back into your business.
Here are 10 small business tax savings tips to think about as 2018 gets under way.
1. Utilize tax filing software
While this recommendation may be a no-brainer for the small business owner who wants to avoid headaches, it’s applicable to even the tax-savviest entrepreneurs; it offers protection a small business owner may not be able to afford otherwise.
Platforms like TaxSlayer, TurboTax and H&R Block can help you prepare and file your tax return online while backing up that filing with accuracy and maximum-refund guarantees. Having a shield that ensures the accuracy of your return — and guaranteed reimbursement of any fees or penalties you’ve been charged — makes every other tax hurdle easier. I’ve personally used each one. I tend to prefer them in the order I’ve listed them.
2. Keep close tabs on all receipts
Receipts create the financial dashboard of how you spent your money throughout the year. Many of those receipts are for goods and services that can be deducted on your taxes, offsetting taxable income. Depending on your business structure, there are specific deductions you can take for certain structures, plus deductions that apply across all structures. Of course, keeping receipts for an entire year is a hassle; many pieces of paper get misplaced or tossed.
However, 1tapreceipts can change that by offering an app that captures, stores and organizes all your receipts in one place. You’ll be able to import receipts from photos as well as forward email invoices from your inbox. The app automatically extracts line items from each receipt using machine learning and artificial intelligence, even if receipts are double-sided. This way, you’ll make sure you obtain proof of, and retain that proof, for every expense deduction owed you. Happily, the app syncs with most tax-filing software.
3. Pay for your retirement now (and get a payoff later)
A self-employed worker’s taxable income can be reduced by putting additional money toward a traditional retirement account — the money isn’t taxed until the funds are withdrawn in retirement. Small business owners under 50 can contribute up to $5,500 (per taxpayer) to a traditional or Roth IRA; those over 50 can put up to $6,500 toward their retirement savings.
Your financial advisor can pinpoint the amount that makes the most sense for your cash flow, but this is a tax move that pays off both now and later.
4. Deduct your home office.
Many small business owners operate from offices at home, but not all of them realize they can deduct expenses related to that home office. These can include insurance, mortgage interest payments, repairs and utilities like internet service.
You do, of course, have to determine what portion of your home is dedicated to running your business (the tax software does the mathematical calculation for you), but this deduction can benefit both homeowners and renters.
5. Deduct your car expenses.
The trick here, again, when you’re deducating expenses, is to calculate what percentage of the time your car is being used for work. From there, you can apply that percentage to your overall car expenses.
For this category of deduction, two types are available: the IRS’s standard mileage rate or your actual car expenses (including insurance, gas, and repairs). Figure out which one makes the most financial sense before filing so you can maximize your savings.
6. Get your money’s worth from your business equipment.
Section 179 allows small business owners to avoid tracking depreciation by treating equipment as a business expense in the year it was purchased (with an upper limit of $500,000). Business equipment encompasses anything a small business owner may need to run a business, from an industrial-grade oven to office furniture to computer items.
A Section 179 calculator can help you determine how much you can save by taking the “lump sum” approach; keep in mind that Section 179 doesn’t automatically kick in. You must file a Form 4562 to elect it.
7. Hire family members to work for you.
If you have family members who can help with tasks essential to your business — say, a teenager who can help mow lawns as part of your lawncare business — you can add tax savings to the benefits.
Hiring a family member means you can take a business deduction for reasonable compensation paid to that person (lowering your taxable income), and it can also result in your being able to avoid taxes such as FICA and FUTA.
8. Keep an eye out for carryovers.
Some deductions or credits may not be fully used in one tax year. They are eligible to be carried over into future years. These can include items like capital losses, net operating losses, home office deductions and charitable contribution deductions.
Track these (or have your software do it), so you don’t forget them from one year to the next.
9. Don’t sell your old equipment.
If you want to get rid of property that’s no longer providing ROI to the business, find out whether it would be better to abandon it (an ordinary loss) or to sell it (a capital loss).
An ordinary loss is fully deductible. Find out how your property may be classified under Section 1231 to determine how you should rid yourself of it.
10. Take advantage of penalty relief if you’re eligible.
Despite following these steps and/or the recommendations your accountant makes, you may incur an IRS penalty. If that happens, you need to determine whether you’re eligible for penalty relief.
Some penalties are eligible for penalty relief. People eligible for relief include those who tried to follow the legal requirements but were unable to meet them due to circumstances beyond their control, or those who were able to resolve an issue pointed out in their penalty notice. Not everyone in these two groups qualifies, but it’s worth finding out whether you do. And that’s money back in your pocket for an honest mistake.
You don’t need to make small business ownership more financially draining than it already is. By accounting for deductions and investigating your options, you’ll find savings you didn’t know existed.
Call Scott A. Kunkel, CPA PC today in North Richland Hills at 817-498-1040 to have a chat about your small business tax health.
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