Small business tax preparation is nothing to take lightly. While large corporations have accounting departments and teams of tax attorneys to make sure the company isn’t paying a dime more than it owes Uncle Sam, many small business owners spend countless hours navigating the archaic tax code on their own, wondering if they’re missing an important detail that is going to cost them.
The good news is that calculating small business taxes on your own, or with minimal assistance from an accountant, can be a manageable exercise. Here are a few key tips to help you get it right.
Give yourself enough time
Waiting until the last minute is a dreadful idea. The federal government gives you several months to prepare your taxes, so it’s critical to capitalize on that timeframe by starting early. Make some time to look over your financial information for the past calendar year as soon as it's ready, ideally at some point in January.
The key benefit to starting early is that it gives you more time to address unanticipated issues that arise when preparing your taxes. It will also leave you less panicked, and therefore more lucid, as you prepare your taxes. You’ll be less likely to make mistakes that will end up costing you more time and money in the future.
Factor in deductions
There are a number of small business tax deductions that can save you a serious chunk of change. Make sure you retain receipts of expenses and keep them organized each month to avoid trying to remember and record them at the end of the financial year.
1. Travel/Transport: This one requires some advance planning. If you plan to deduct the cost of a company car, you need to keep records from the beginning of the year.
The simplest method of claiming a deduction for your vehicle is the Standard Mileage Method, in which you claim a deduction of 54 cents per mile (2016 rate), traveled for business purposes. Deductions for mileage must be specifically for business purposes, so your commute to and from home does not count. However, driving to business meetings with clients, picking up supplies or consulting with your accountant are all legitimate uses that can be deducted.
On the other hand, if you’ve spent a lot of money over the past year on expensive repairs for your car, you might want to consider the Actual Expenses deduction. This calculation is more complex, and it consists of figuring out what percentage of your car use has been for business. If you determine that to be 50 percent, for instance, that means you can deduct half of the total amount you spent over the past year on gas, repairs, oil changes and, potentially, the depreciation of the value of your vehicle.
2. Home office: If a certain part of your home is reserved for your work, you can reflect this percentage in your tax filing. The first way to do this is the Regular Method, which allows you to take into account all of your home-related expenses, including utilities, mortgage interest, insurance, maintenance and depreciation. You can then determine what percentage of your home is devoted to business. If your home office takes up one-fifth of the house, for instance, then you can deduct 20% of all of those expenses.
The Simplified Method is much easier. It allows a deduction of $5 per square foot used for business, up to a maximum of 300 square feet. If your home office is 200 square feet, then you can deduct $1,000.
3. Employee wages: Generally the wages, salaries, bonuses and commissions you pay to employees are tax deductible. Compensation is only deductible if the IRS considers it “reasonable.” That means that whatever you are paying "would ordinarily be paid for like services by like enterprises under like circumstances." According to experts, the IRS typically only challenges the reasonableness of compensation if the person being paid has a relationship with the business that might lead you to pay him more than his labor is worth. For instance, if he is a family member or has a large stake in the company.
4. Independent contractors: What you pay for your contract labor is also tax deductible. The important thing to remember as you prepare your taxes is to send all of your contractors a 1099 form for their own tax purposes, plus submit a 1096 form to the IRS that details the amount you paid them.
Whether you rely primarily on employees, independent contractors or a mix of both, the best way to ensure that you are in compliance when it comes to taxes is to put in place a system that tracks your workers’ hours, creating a rock-solid record for both you and the IRS. Timesheet Mobile, for instance, uses geofencing technology to accurately track employee hours and locations, providing you with a complete assessment of your workforce in
5. Technology: Taxes are one of a number of things to consider before you invest in technology for personal or business use. For starters, any equipment or devices that you purchased and use only for business are 100 percent deductible. You can either deduct the entire cost in the first year or you can choose to deduct it over a number of years based on its depreciating value.
Things get a little trickier when it comes to gadgets that you use for both personal and business purposes. However, just like the car deduction, your tech deductions require you to estimate the percentage of the item’s use that is devoted to your business. If you determine that 70 percent of your laptop use is business-related, then you can deduct that from what you paid for it.
What is likely to generate skepticism from auditors, however, are devices that are regarded as boutique or largely recreational. If you are already claiming a deduction for a computer and a cell phone, for example, then it may be trickier to also make a claim for the latest tablet or Apple Watch.
When in doubt, seek professional advice
There are plenty of other deductions that you and your accountant should look into, as those mentioned are simply a starting point. Taking plenty of time to assess your expenses should help you feel prepared and informed as you pull together your taxes for the financial year. You may be surprised at how many write-offs are available for your small business!