For a small business, the end of the year means a lot of things. From thinking about and determining what you want to achieve the coming year to beginning on the goal setting process. You also are in the middle of holiday shopping for your colleagues, clients, vendors and employees. And the end of the year signifies the time for one of the most important tasks, the task of closing out your books for the calendar year and preparing for taxes.
Tax time is one of the most stressful and gruesome times for any business, and when the business in case is a small business, it becomes all the more stressful because as a small business, it can be really difficult to navigate the annual exams of the IRS and pay the hefty fees in case anything goes wrong. Filing personal taxes is a difficult task and when it comes to businesses, the process can be extremely overwhelming. While you can make use of the services offered by third parties and software, having a basic knowledge of the process is necessary. If you are willing to read the fine print and sift through the paperwork, you can be successful in saving a lot of money in the form of tax deductions.
If you are a small business owner, you can make use of these best tax tips for small business, that will not only help you minimize the money and time needed to manage it all, but will also be helpful for you in making the best use of deduction offered to the small businesses.
Best Tax Tips for Small Businesses – Tips for Preparation
Here are the best tax tips for small businesses to prepare for taxes.
1. Avoid Costly IRS Penalties by using a Payroll Tax Software
You will be surprised to know that as many as one-third of all companies are fined each year for handling payroll taxes incorrectly? This is because of the fact that payroll is handled by employees on their own using spreadsheets without taking the help of any third party. It is important to invest in a good payroll software to help you manage your taxes the expert way and to avoid paying any extra money in penalties by the IRS. This best tax tip for small businesses can go a long way in helping you do goof with your taxes.
2. Keep Personal and Business Finances Separate from each other
Another of the best tax tips for small businesses is to keep personal and business finances separate from one another. One of the most common and costly mistakes business owners make is commingling their personal and business funds. The best thing to do is to have a separate bank and a separate credit card for your business finances. This will make it easier for you to organize your taxes when the time comes. If you are audited anytime by the IRS, you need to make sure that you have all the documents needed to support the business expenses you have showed in the books.
3. Get Organized
Tax time is only taxing on the people and businesses who have not prepared themselves for the ordeal. One of the best tax tips for small businesses is to make sure you implement a few things into your daily, weekly or monthly routine. This will help you stay focused and will remove the stress that is synonymous with the tax season. Here are some tips to get you organized for the grueling tax season.
- Keep all the paperwork you have done in one place through a filing system: The best thing to remains stress and trouble free when the tax season comes is to buy expandable folders, one for each month. File all the deposit slips, receipts, ATM withdrawals etc. for each month in separate folders designated for each month. This will make it easy for you to get all the paperwork for each respective month and will eliminate the chances of losing any important documents.
- Organize the Paperwork each Month: Do not leave it till the death moments. Spare a few hours each month to organize your paperwork in the folders. This will save you the time and effort of doing all the work of 12 months in a single sitting. Also, take this time to reconcile your credit card and bank accounts with the receipts and deposit slips.
4. Track Revenue and Expenses
The tax time can become a breeze if you use an accounting software. You will be able to create financial statements quickly after updating the software with your revenue and expenses. Once you have created the financial statement, send them over to a tax professional or a CPA to file your tax return.
Best Tax Tips for Small Businesses – Tips for Business Tax Deductions
Expenses are the costs of doing a business. All the expenses incurred by the business are considered tax deductible. The expenses need to be necessary and ordinary which are defined by the IRS as:
Necessary Expense: The expense that is appropriate and helpful for your business or trade
Ordinary Expense: The one that is accepted or common in your business or trade
As a small business owner, there are some tax deductions available to you. Here are these deductions and the best tax tips for small businesses to make the best use of these deductions.
5. The Home Office Deductions
You can deduct a portion of your business expenses if you are using a part of your house to run your business. This includes the utilities, insurance and the mortgage interest. Homeowners, as well as renters can make use of this deduction. There are some specifications and requirements to take these deductions. Find out if you meet the eligibility criteria to apply for these deductions here.
6. The Auto Expense Deduction
You can deduct the car expenses from the total business expenses if you are using your car for your business. The deduction can be made use of through one of the following methods.
- Actual Car Expense: The actual car expenses such as the insurance, the repairs and gas can be deducted. However, if you are using your car for business, as well as personal purposes, you will have to first calculate the percentage it was used for business purposes add then find out the car expenses that were taken up for business. For example, if you drove your car for 15,000 miles and 6,000 miles of these were for business purpose, divide 6,000 by 15,000, which gives 40%. This is the deduction you can make for your business as car expense.
- Standard Mileage Rate: Multiply the total number of miles you have driven the car for business purpose by the standard mileage rate set for the year.
Another of the best tax tips for small businesses is to do lunch. Yes, you read that right. You can deduct as many as 50% of the meals that were related to the business. This includes taking your client out for lunch or ordering pizza for your employees as a treat. You need to be sure that the meals are not too extravagant and lavish. A best tax tip for small businesses is to treat your business expenses just as you would treat your personal funds. It is not necessary to dine in a new five-star restaurant if you wouldn’t do it if it was your personal fund.
8. Independent Contractors are Better than Employees
As a small business, you might not be able to afford hiring employees especially when you have just started, as you have to pay them payroll taxes and other benefits. Another of the best tax tips for small businesses is to hire independent contractors instead of employees. You will not have to pay payroll taxes and other benefits this way. However, you need to make sure that the contractor you hire does not fall under the same category as an employee. If the contractor falls under the legal definition of the employee, you can be charged with penalties. Also, make sure that all the contractors are made to fill the W9 form. This will ensure that you have all the information needed to provide them a 1099 tax form when the year ends.
9. Section 179 deduction
If you purchased a property or an equipment worth up to $500,000 for your business and sold it the same year, you can recover the full cost of it. This will save you 5-10 years of recovering the cost through depreciation deductions.
10. Set up a Retirement Plan
As a small business, you should consider setting up a retirement plan. It is one of the best tax tips for small businesses. This will provide you several benefits for your employees, for your business and for yourself. Here are just some of these benefits.
- Assets will grow tax free
- The contributions made by the employer are tax deductible
- You can attract better workforce and retain better employees
Best Tax Tips for Small Businesses – Tips for Filing the Business Taxes
Here are some of the best tax tips for small business when it comes to filing your business taxes.
To make sure the tax return you make is received in time and before the deadline, the best thing to do is filing it electronically. You can make use of one of the many software available in the market to e-file your tax return for free. Once the tax return is received by the IRS, you will receive a confirmation code. This is one of the best tax tips for small businesses as you don’t have to wait in uncertainty that whether or not your tax return you sent to the IRS by mail has been received yet or not. Also, if you are looking forward to a refund, sending an electronic tax mail is much better as it is processed faster than the snail mail.
12. Don’t Get Late
Nothing can beat this best tax tip for small businesses. It is important for you to make sure that you don’t get late with filing your tax returns. You will have to bear a number of penalties in case you fail to file the tax returns on time. Here are the penalties you will have to face in addition to the interest.
- Not filing in time: The penalty for not filing the tax returns on time has increased recently from $135 to $205
- Not paying on time: It is based on the amount of tax you are owed and it continues accruing until you pay it in full
Another best tax tip for small businesses is to file you tax returns even if you don’t have the money to pay the bill on time. You will be able to avoid the penalty for not filing the tax return. You can also check for the programs that offer tax relief to small businesses.
Filing you tax returns can be a grueling process. There are many things to take into account when the year end is near and it is time to prepare for filing your tax returns. Even if you think you can manage the tax process on your own, it is still better to invest in a tax professional who will take care of all the tax related issues. And, it is surprisingly very affordable as well.Hiring an experienced tax professional will ensure that all the minute details are taken care of and are handled the professional way. You will also be able to save money that you may have to pay in penalties otherwise in case you fail to file the tax properly or make a mistake in the process.
Make sure that you keep good records of all your income and expenses throughout the year so that you are able to make informed decisions at the end of the year. Reconcile your credit cards and bank each month to make sure all the financial information is correct. Also, make sure there are no undeposited funds or any uncleared items.
There is no need to pile up unused and unsold inventory as you will have to pay taxes for them. Th best tax tip for small business owners is to sell these off instead of storing them and spending a lot of cash on the process. You can donate these and get tax deductions.
As soon as you enter into a new fiscal year, prepare a cash flow forecast. This will help you in estimating the tax impact for the new year and you can start preparing for the payments from the beginning. If you choose to model the payables and the flow of receivables alongside your sales and budget pipeline, you will be able to not only go through the process of taxation smoothly, but these factors will also be helpful for you to grow and thrive your business year by year.
The Final Word
It is important as a small business owner to prepare for tax filing and do the needful throughout the year. If you keep it all for the end, it is going to take a lot of time to do all the things necessary. Filing for tax returns is not an easy task. It is advised that you take professional help for the matter. Now that we have provided you some basic and the best tax tips for small business owners, it is up to you to make use of them and use them when the filing time comes. As a small business, you cannot afford paying hundreds of dollars in penalties just by committing some common and small mistake when filing tax returns. With the above-mentioned tips, you will be able to not only make the tax process a breeze, but will also be able to save a lot when it comes to penalties. The best idea is to take help of experts to do the job for your small business. These experts are experienced in handling tax related tasks and will do all that is needed to file the tax returns properly. They also have knowledge and experience about handling difficult situations when it comes to taxation, and will find you a way out in case you are faced with any of these. It is important to make sure you run a background check before hiring anybody to work on your taxes.
These best tax tips for small businesses can go a long way in filing the taxes the right way for your small business.