Is your small business paying more in taxes than is necessary? The answer is probably yes.
In a recent webinar hosted by SCORE Mentors, Jennifer Warawa of Sage Accounting, outlined four mistakes that small businesses make that result in higher tax payments. These include:
Not planning in advance (pay attention to your taxes all year, not just during tax season)
Rushing to get taxes done
Forgetting to double check your filing
Not paying quarterly taxes (a problem that can leave you with a hefty payment come April 15)
So what can you do to reduce your taxes this year? Warawa went on to recommend nine strategies:
Keep accurate records
This is the single most important step you can take to reduce your tax liability. Record keeping is the best way to stay on top of the deductions that you can take – from use of your home as an office, entertainment expenses, office equipment, and so on.
Claim the home office deduction
The home office deduction is often perceived as a red flag that may prompt an IRS audit. Don’t be deterred, if you use your home for business, claim that deduction. The IRS has even made it easier to do so with the introduction of a simple claim method that allows you to claim $5 per square feet up to 300 square feet of home office space. Alternatively you can use the regular method, which requires a little more record keeping during the year and is based on actual expenses such as utilities, rent, mortgage, home repairs, etc. You must then factor in the percentage of your home devoted to business. Use IRS Form 8829 to figure out the exact calculation.
Read more about what constitutes an eligible use of the home for business purposes and whether you qualify for the deduction in How to Claim the Home Office Tax Deduction.
Don’t forget travel and entertainment expenses
Another oversight that small businesses make relates to travel and entertainment expenses. If you’ve traveled to a seminar, tradeshow, to meet a client, or taking a client to dinner, you can deduct those costs as long as the primary purpose of your trip was business. The IRS allows you to claim 50% of your expenses if business was discussed. Read more about Travel Expense Deductions: What You Need to Know. Whatever you do, keep good records – the receipt, business purpose, date, who was in attendance, etc.
Another commonly overlooked deduction are business insurance premiums. The IRS allows businesses to deduct general liability, property, malpractice, contributions to state unemployment insurance, life insurance, medical insurance premiums, and more. In addition, if you contribute toward your employee’s health care premiums you can qualify for a business health care tax credit.
Pay attention to the small deductions
Don’t forget your small deductions – business books, seminars, magazine subscriptions, Chamber of Commerce dues, Internet bills, etc. – these can add up quickly and are all fully deductible. Keep track of each item and receipt and talk to your accountant regularly about what can be deducted.
Work with an accountant
Accountants can bring a lot of value to your business. They can help you understand that latest cost code and save a lot of the cost and stress associated with doing taxes on your own. If you can’t stay on top of this stuff on your own – it’s time to get an accountant, says Warawa. Although the initial costs may seem daunting, a good accountant can save you money in the long run and help you stay out of trouble with the IRS.
An accountant can also be a valuable advisor and partner throughout the year. Accountants see how different businesses are run and can provide advice and best practices based on what they’ve seen work elsewhere.
Avoid mixing personal and business.
You probably hear this all the time, but these can be easily intermingled, which can lead to major confusion during tax season or even legal infraction. Get a separate bank account, credit card, and track everything that goes in and out of the business.
Avoid IRS audit triggers
No one wants an IRS audit, Warawa recommends four ways to avoid one:
Avoid confusing equipment and supplies. Supplies are used and replaced throughout the year and can be deducted. Equipment is categorized as higher value items that have a longer life, like computers – you can take a 100 percent deduction upfront or depreciate the cost over five years.
Don’t over-deduct gifts. While you can deduct the cost of client gifts, you can only claim the first $25 for each gift. IRS Form 463 discusses this in more detail.
Filing manually. Surprisingly enough manual filing can trigger an audit. Why? Manual returns can be more error-prone and also raise concern that you might be trying to hide something. Online filing is preferred by the IRS and state revenue offices because they are less prone to errors and are even mandated in certain states.
Missing deadlines. Don’t be late, missed deadlines raise eyebrows, can flag an audit and result in late fees and penalties.
There are a few other potential red flags that the IRS pays attention to, read more about these in our blog: 5 Signs that Your Small Business Return Might Prompt and IRS Tax Audit.
Consider the impact of your legal entity
Your legal entity affects the taxes you’ll pay and how you file. Certain tax structures have tax benefits, talk to your accountant about which one is right for you. For example, many sole proprietors might be better off structuring their business as an S Corporation once they reach a certain tax bracket.
View the entire webinar on-demand: Tax Strategies to Ensure You Pay #NotOneDollarMore.