It’s tax time again and this is one of the most significant issues facing small business owners. Without proper tax planning, hundreds and thousands of dollars might be leaving off the table. In fact, statistics indicate that one out of three small businesses spend amount equivalent to two full workweeks annually on federal taxes. Besides, 87 percent of small business owners return preparer or pay outside accountants as they find forms too complicated to do independently.
It is also important for business owners to meet their responsibilities to the federal tax while seizing every opportunity to reduce the bill. Here are 10 tips for small businesses to save on tax.
1. Employee Taxes
If you have employees, you need to withhold a number of taxes from their salaries. These include:
Withholding: Businesses need to withheld Medicare, Social Security (FICA) and federal and state income taxes from employees’ pay.
Employer Matching: Businesses need to match the Medicare and Social Security (FICA) taxes and should pay them together with their employees.
Unemployment Tax: It is also essential for businesses to pay the federal and state unemployment taxes.
Considering these taxes that a business needs to pay on behalf of their employees, it is understandable and small business owners are often tempted to classify their employees as independent contractor. This no doubt helps in cost saving, but it is important to properly classify your workforce. There are strict rules regarding proper classification of a worker and you can distinguish between the two using this infographic.
If you fail to apply the law properly, remember that there are steep penalties involved. It is also important to use a payroll service to keep a proper track of such tax deductions.
2. Tax Write-Offs
There are various business expenses to deduct from your revenues that will help you to reduce your taxable income. These include both ‘ordinary and necessary’ expenses. Some of these deductions are obvious such as expenditures on employee salaries, business travel, office equipment, and/or facility rent. However, the rules associated with tax write-offs are not really simple.
Here are a few potential deductions that you shouldn’t overlook:
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Travel Cost: This includes the costs of trips that combine both business and pleasure. If over 50 percent of the trip is dedicated to business, you are allowed to deduct the traveling costs as business travel along with other business-related expenses.
Business Losses: If you have had incurred any business loss in a financial year, you can deduct the amount against your personal income to reduce taxes. However, if the loss exceeds your personal income for the financial year, you can use some of the year’s business losses to reduce your taxable income in the coming years.
3. Quarterly Estimated
This is one mistake many entrepreneurs commit and failing to do this can be especially troublesome for those running for home-based businesses. Without estimated tax bills chances are that you will face cash flow problems, not to mention the potential for facing IRS penalties. Some of these issues include:
Who should pay estimated tax bills?
If the total tax bill for your business in a given year exceeds $500, you will have to pay quarterly estimated taxes, as peer IRS rules.
How much do you need to pay?
If you meet the previous criterion, you need to pay 90 percent of the total tax bill that is owed by the end of the year. Or else, you can pay 100 percent of last year’s total tax bill. In case your business income exceeds $150,000, you have to pay 110 percent of the tax.
However, businesses are allowed to subtract their expenses each quarter and apply the income tax rate along with other self-employment tax rate (if applicable) to their quarterly profit.
4. Home Office Deduction
The IRS is providing a simple way to calculate home office deduction for this tax-filing season too. According to Publication 587, $5 per square foot can be deducted with a limit of maximum $1,500 for a 300 square-feet space for your home office.
If you want to save more money using the home office deduction using the traditional method will be beneficial, although it is a more daunting method. According to this method, you need to measure the square footage of your home office and divide it by the total square footage of your home and then apply the percentage to various home-related expenses including utility bills, mortgage interest and home depreciation.
A better option is to calculate your home office deduction by using each method and then opting for the one that offers the most savings. However, the criteria for who can claim this deduction remain changed. It is important to remember that a portion of your home must be exclusively and regularly used for business purposes.
5. Qualifying for Healthcare Tax Credit
Small business owners can qualify for health care tax credit for up to 50 percent of the premium paid, provided their business meets the following criteria:
- The business has less than 25 full-time-equivalent employees
- The average annual wage they pay per person is less than $50,000
- If the company pays at least 50 percent of the self-only health premiums of the employees
- The health insurance should be purchased via the Small Business Health Options Program Marketplaces.
6. Section 179 Property Deductions
If you have just begun to use a certain property for your business, you can deduct its total amount in that particular financial year, according to Section 179. For 2014, the maximum amount was $500,000 for eligible business property.
Some eligible deductions are as follows:
- Any type of facility that you are using for business or research purpose
- Off-the-shelf computer software
- Property for production, manufacturing and transportation
- Property or building used to store horticultural or livestock products
Properties that are excluded from tax deduction:
- Land outside of the U.S.
- Investment property
- Buildings used to store heating and air conditioning units
- Buildings providing lodging
7. Sales Taxes
Most service-oriented business remain exempt from sales tax; products are, however, mostly taxable other than a few exceptions like food and drugs. If the product or service you offer is product or service, you need to first register the business with your state’s tax department. Following this, you need to track taxable and non-taxable sales and file the sales tax return for your company.
IRS determines whether or not your business is liable to pay state sales tax based on various criteria, lone of which is just having a mere ‘presence’ in a state. Now, if you are selling items in a state by catalog or via Internet but don’t have a physical presence in that state, you are typically not subject to their state sales tax although you have to pay the state’s “use tax”.
Again, consider that by ‘presence’ the IRS does not necessarily mean having a retail outlet in a state. It also includes an office, your employees working in that state, or a warehouse. You should therefore consider your sales tax responsibilities for every state where you’re doing business.
8. Charitable Contributions
You can claim deduction on your charitable contributions on the individual shareholders’ tax returns, unless it is a C corporation. This deduction is application for a sole proprietorship, limited liability corporation, partnership, and S corporation.
There are some basic rules to consider to obtain the maximum tax benefits:
- The charities where you’re contributing must be listed by the IRS as “qualified organizations”.
- If the contribution exceeds $250, you will need a letter of receipt from the organization otherwise a canceled check is sufficient.
- For donations of property, their fair market value during the time of the contribution can be deducted.
- Contributions are deducted when in the year it is made.
- The value of services or time you volunteer cannot be deducted.
- If the part of a contribution benefits you, you cannot deduct the amount.
9. Deducting Loans
In general business loans are not considered as business income; however, a notable exception here is when you negotiate with the lender/creditor to reduce your debt. The forgiven/released debt is taxable.
Business loans, on the other hand, can help you obtain substantial tax benefits. Both the principal and interest of your loan are considered as business expenses and can be deducted from your taxes. However, you need to report the total amount of the business loan along with the expenditures and assets financed for operating the business.
10. Start-Up Expenses
To encourage people to invest/open a new business, the federal government allows a $5,000 write-off tax for start-up expenses. The cost may include amounts paid for:
- Creating or purchasing a trade or business
- Investigating the creation
- Advertising the opening of the new business
- Market survey
- Employee training and more
In conclusion, remember that good record keeping saves money in the long run. It is therefore recommended to keep your tax-related documents for a minimum seven years or more. Also, you need to think long term. Working with a tax professional here is a good option to figure out tax strategies that will save your money as well as from legal hassles resulting from underpaying.