Tax season is upon us, and for new small business owners this can be a truly eye-opening experience. Fortunately for those who take the time to prepare for the process, it doesn’t have to be the typical annual slog through last year’s receipts.
Being organized and having the help of a tax expert can make it a much more smooth process. Here are some tips for getting started.
Keep Accurate Records
Although it’s too late to fix this for the 2015 fiscal year, it’s important to remember that record keeping throughout the year is essential for all small business owners. Barbara Weltman includes this in her list of the 10 biggest mistakes small businesses make on American Express’ Open Forum.
“You need thorough and accurate records so you can properly prepare your returns — without them, you may overlook legitimate write-offs,” she notes. “Perhaps even worse, you may lose the deductions you’ve taken if you’re audited and don’t have the records needed to prove entitlement to the deductions. Save receipts, invoices and other papers that show income and expenses. Use a good accounting tool — software or in the cloud — to record your income and expenses.”
Hire a Quality Accountant
We all know that taxes can be complicated. For new small business owners, it’s probably not best to take it all on by themselves. Consider asking fellow business owners and other peers for their recommendations on reliable accountants. And, as Weltman writes, beware of those that may be looking to bend the rules.
“Don’t use anyone who suggests that you hide income or take write-offs you know you aren’t entitled to — this is a tip-off that the preparer is shady,” she explains. “If the IRS catches the preparer, all the preparer’s clients may come under audit. And, by not using a good preparer, you may miss out on write-offs you’re rightfully entitled to.”
Know the Affordable Care Act
Health insurance can be confusing for new small business owner, so understanding the Affordable Care Act may be an important part of the process. Adam C. Uzialko writes about this for Business News Daily.
“The most notable issue for many businesses is that they could face tax penalties for failing to provide health insurance to employees, or for failing to report to the Internal Revenue Service what type of coverage they have provided for employees,” he says. He quotes Ravi Ramnarain, CEO of a Florida accounting firm, who says the Affordable Care Act in 2016 “now applies to businesses that have 51 to 99 employees. Businesses that are not in compliance with the necessary requirements are subject to heavy fines.”
File on Time
Although it may seem like an obvious statement, it’s still a rule that many don’t take seriously — don’t mess with IRS deadlines. And don’t wait until the last minute to file your business’ taxes. In a story for Time, Susan Krauss Whitbourne discusses the negative results of tax procrastination, including both increased stress and costs.
“According to surveys, tax procrastinators have been known to overpay by hundreds due to mistakes that came as a result of rushing the process and making last minute changes, and they fork over roughly double the amount that early filers pay just to get their taxes done,” she explains. “Understandably, procrastinators are also much less comfortable with their often-frantic filing methods they’re forced to employ as the clock is ticking.”
Understand Deductions
Even with an accountant on board, it’s important that small business owners have an understanding of tax basics. The array of deduction opportunities can be both surprising and confusing. Here are five that often come into play for small businesses:
- Startup Costs: The early stages of opening a small business include a wide array of different expenses. As David McKeegan points out in his article for Entrepreneur.com, the IRS allows a tax deduction up to $5,000 of those costs in the first year.
“This deduction allows you to reduce your taxable income, both for income tax and self-employment tax, which includes Social Security, and Medicare tax,” he explains. “Typical startup costs include things like purchasing equipment, supplies, and operational fees, but the rest of your startup costs should be depreciated over 15 years.”
- Home Office: There are also tax breaks available to those who run a business out of their home, but taking advantage of these incentives can be tricky. If an owner considers his home office to be nothing more than a laptop and a couch, that likely won’t fly. But a dedicated room that is used solely for work purposes will. Here’s how U.S. News & World Report describes it:
“It’s your primary workplace (i.e., you don’t have a separate office space that you are required to attend from 9 to 5 every day); it’s used exclusively for work; you regularly meet with clients there; and/or you have a place such as a garage that you use to store work-related supplies.”
- Auto Expenses: Most small businesses require the use of a vehicle in one way or another, and a tax deduction goes along with that. However, it requires record keeping for both use and repair, which can be easy to overlook. In a story for SmallBizTrends.com, Weltman points out another option.
“In deducting costs, the need to keep records of cost (e.g., gasoline, oil changes) is eliminated if you rely on the IRS standard mileage rate of 57.5 cents per mile in 2015 instead of deducting your actual outlays.”
- Contract Labor: Small businesses that rely on independent contractors are also eligible to receive a tax break. Weltman writes in her SmallBizTrends.com piece that this requires distributing Form 1099-MISC to contractors that made more than $600 in 2015.
“If payment is made to the contractor via credit card or PayPal, it’s up to the processor to issue them Form 1099-K, but you may want to send your own 1099-MISC for personal protection,” she adds.
- Charitable Donations: It’s smart for small businesses to align with charities for a variety of reasons. The good work charities do should be the first priority, but tax-deduction purposes come into play as well. As this story by Rieva Lesonsky on SmallBizTrends.com notes, there are several options for charitable contributions:
“ … writing a check, volunteering at an organization, sponsoring its events, donating products. You can choose to have a percentage of profits from your sales of a particular product or service, or sales on a particular day, go to that organization. (It’s a good idea to talk to your accountant beforehand to make sure the tax ramifications of your contributions are handled properly.)”
