4 Helpful Tax Tips for Small Businesses
By David L Evans, CPA, Esq.
This tax season, if you are a small business owner, you need to understand these key tips on how to minimize your tax liabilities and avoid problems with the IRS. Here are four helpful tax tips for small businesses, whether you are a new or well-established business:
1. Choose the business structure under which you will file.
Picking the right business structure is one of the biggest decisions that business owners make when starting a new small business. To protect personal assets from company liabilities such as lawsuits and debts, business owners usually choose some form of corporate structure.
Common types of business entities include sole proprietorships, partnerships, limited liability companies and corporations. Corporation options include a Limited Liability Corporation, an S Corporation or a C Corporation. Each business entity has its own IRS form as well as its own benefits and limitations. Not all small businesses carry the same tax burden. Choose your legal entity carefully as that decision can have a tremendous effect on your tax liability throughout the years.
Major differences between business structures become evident during tax filing time. Limited liability companies (LLCs) and S corps are “pass-through” entities. Business owners and shareholders report profits of LLCs and S corps on their personal tax returns. They will now, under the new tax bill, enjoy the ability to deduct from their personal income taxes a portion (with limits, this deduction could be up to 20% of the business’ net income) of the net income from business and real estate operations. On the other hand, C Corps are taxed first as a standalone business entity and then, when any profits are distributed to the shareholder as dividends, the dividends are taxed on the shareholder’s personal tax return. For a C Corp this means that double taxation is the rule. However, under the new tax law, all C Corporations are taxed at 21% and then most dividends are taxed to the individual owner at 20%. With the new tax laws, many business owners will choose the C Corp entity and retain earnings taxed at the 21% rate in the C Corp. This is a tax-efficient way to accumulate net income for the business to use as working capital and finance business growth. Still, some business owners may decide to convert to S corps, taking advantage of paying taxes only at the personal level, and if eligible, to take the new 20% deduction of qualified business income.
Would it make sense for your business to switch to a C Corporation to take advantage of the new lower tax rate? Should you be an S Corporation and use the single tax rate combined with the 20% deduction of qualified income? Do your research to determine what legal entity best suits your needs.
2. Consider filing for an extension.
Need more time to pull everything together for tax filing? Filing a tax extension is free, easy to accomplish and gives you up to six months of additional time to prepare your tax return. The IRS allows you to file for a first extension for any reason and grants it automatically as long as you complete the proper form on time. Check your state tax laws; some states accept IRS extensions while others require you to file a separate state extension form. But remember, the extension is only an extension of time to file….one must still pay all income taxes due by the due date.
The benefits of filing for an extension include more time and less stress. You will be able to thoroughly prepare and review your return, ensuring that you file under the most beneficial type of entity. The extra time frequently helps you to confirm that you are identifying and evaluating all possible deductions.
3. Do your research to identify all possible deductions.
Deduct ordinary and necessary business expenses. All companies in your specific trade have in common specific ordinary expenses. Companies in other trades may have completely different ordinary expenses. Conversely, necessary expenses are quite specific to your business, but not always to every company in your same trade.
Common business deductions include rent on a business or home office, supplies, furniture and equipment, such as computers, copiers and fax machines. Many small businesses can also deduct costs of healthcare benefits for their employees.
Deduct startup expenses. If you are a brand-new startup, you can deduct a wide array of startup expenses, some even before you open your doors to customers. You may even be eligible to deduct research costs related to determining the market for your business products. Be sure to include costs such as training employees, attending trade shows and seminars, setting up accounts with suppliers and advertising for potential clients.
Track your mileage. Most people are aware that you can deduct business miles, but may not be aware that you can also deduct mileage driven for medical purposes as well as miles driven for charitable purposes.
Donate unsold or unused inventory. Businesses can claim deductions for donations of money, supplies, and property – a much better solution than spending cash to store those unused items. Donations of goods greater than a $500 value have stricter reporting rules.
4. Make estimated quarterly tax payments.
Most people are well aware that it is important to pay taxes on time. What new small business owners may not realize is that all self-employed persons are responsible for making quarterly estimated tax payments throughout the year. Failure to make these estimated payments during any year with the exception of the first year of the business’ operation may incur interest and penalties.
Remember, if you are a business owner for the first time, you may not be aware that you are now responsible for both your own portion of Social Security and Medicare taxes and the half typically paid by an employer. Since your income is no longer subject to employer withholding, you may claim half of what you pay in self-employment tax as an income tax deduction.
Help your business grow and thrive year over year with these tax filing strategies for small businesses.
All content provided in this blog is supplied by David L Evans and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
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Mr. Evans is an attorney and licensed CPA in the state of New York. He has demonstrated expertise in areas that include multistate and international tax issues, federal taxation (including latest legislation and cases), as well as estate planning. Mr. Evans provides tax planning and advice to private and public clients, is a contributing author to the New York State Tax Service, and a frequent lecturer on tax issues, appearing regularly on radio and television. He is a member of the New York Bar Association as well as the New York State Society of Certified Public Accountants.