How Small Business Owners Can Make the Most of Their Tax Return
If you missed the first part of our tax series, we’ve partnered with tax experts to create helpful content for small business owners approaching tax time. We recently wrote about when to hire a professional tax preparer, and how to select a qualified tax professional. In this article, we’ve compiled top tips to help you get the most out of your tax return this year.
“Make sure you have your expenses and receipts on file,” says Jayson Mullin, the founder of Top Tax Defenders, “This is the number one tip for small businesses getting ready for tax season. Clean bookkeeping should be a year-round goal for any small business owner. Save receipts, no matter how big or small. Consider using an app to track expenses so you’re not scrambling last minute.”
“Be careful when hiring independent contractors – if the IRS decides later that they qualify as employees, you’ll be facing huge penalties,” says Wendy Connick of Connick Financial Solutions. “One way to feel secure on this point is to ask the IC to incorporate and then hire the business. Auditors are highly unlikely to consider a corporation as an employee.”
“Keep a mileage log and note your mileage every time you drive anywhere for business purposes,” says Connick. “Note that “business purposes” is a pretty broad category: if you drive to the supermarket and pick up some pens for your home office while buying groceries, the trip counts as business mileage.”
“Small-business owners can get a tax benefit from almost anything that is an ordinary and necessary business expense,” says Benjamin Sullivan, a CFP and client service and portfolio manager with Palisades Hudson Financial Group. “Travel, meals, advertising, and insurance costs are just some of the popular deductions. You can also take a deduction for part of the cost of items used both for business and for personal purposes. These can include cell phone bills, car expenses and costs of maintaining a home office. Small-business owners are prime targets for an IRS audit, so it’s essential to properly document all deductions.”
“The best way to keep up with your tax obligations is through good planning at the outset,” says Sullivan. “Either research requirements thoroughly, or invest in a professional adviser who can offer experience and an outside perspective. Maintaining detailed accounting records throughout the year will make tax time much easier.”
“If you owe a considerable amount of taxes every year, there’s a chance you’re missing some big deductions or you might be eligible for tax credits you weren’t even aware existed,” says Josh Zimmelman, owner of Westwood Tax & Consulting. “Spending a little extra on an accountant may actually save you more money in the long run.”
“My one piece of advice for entrepreneurs now is that this particular tax year, more than any other, is one in which you should do everything in your power to defer income into the future,” says Jacob Dayan, partner, and co-founder of Community Tax. This is because with Republicans controlling both the Executive and Legislative branches of the federal government, there’s a decent chance that business tax rates for 2017 will be reduced significantly from current levels. If you can claim a significant deduction that pushes income from 2016 to 2017, do it so you can pay a lower tax rate on it in 2018.”
“Revisit your payroll system: Does your system sync with your accounting software, automate your tax payments and track employee timesheets?” asks Dawn Brolin, Accountant-in-Residence at The Neat Company. “If your payroll doesn’t do those three things, you need to reconsider because you run the risk of not paying your payroll liability.”
“While small business owners may know that insurance is key to protecting their business, they may not be aware that business insurance expenses are tax-deductible in many cases,” says Maxime Rieman, Director of CoverWallet.”The qualifiers are that the insurance coverages are ordinary and necessary for the business operations. This can include such policies are professional liability insurance, commercial auto insurance, general liability insurance, and several others.”
“Be aware of programs that get you money, like the Federal R&D Tax credit,” says Jeff Haskett of Clarus R&D. “New this year, start-ups can turn 10% of what they spend on developing their innovative product or service into cash by offsetting their payroll tax (up to 250K!). Entrepreneurs pay attention, this is ‘no strings’ funding in exchange for what you’ve already done. This credit has been around for a long time, but only applied to those who made an income, so pre-revenue companies were left out. It has been poorly communicated so thousands of startups will miss it.”
Any business owner can follow the tips above to strategize their approach to filing their taxes, and optimize their year-round bookkeeping, organization, and documentation for an improved outcome come tax time.