Discussing taxes involves a strange dichotomy; on one end of the spectrum it can be so boring, complicated, and tedious that you can literally feel your eyes glaze over. On the opposite side, it can be so scary that your pulse races, you second guess every financial decision you’ve made over the past fiscal year, and you wake up in a cold sweat dreaming that your computer crashed and you lost access to countless records and excel spreadsheets. While filing taxes is a necessary duty for your small business, hopefully we can help ease your fears a little. (Sorry, you’re just going to have to deal with the tedium).
It is always better to know what to expect than to enter into a situation blindly. Doing research ahead of time is easier and less stressful than backtracking trying to scramble to get the right documents and information together for your CPA or business lawyer. Here are some valuable tips so that you can keep clean records and glean the right information for when tax time knocks at your door.
· We’re all looking for deductions to save us some dollars, so are you really listing all that you qualify for? Of course business travel, equipment, salaries, or rent are a few obvious ones, but also keep in mind that business losses can be deducted against a business owner’s personal income. If those losses exceed personal income for the year, some of the year’s business losses can be used to reduce taxable income in future years.
· If you plan on combining a personal vacation and a business trip, you may also deduct traveling costs if you spend 50% or more of your time working on this getaway.
· Employee taxes are expensive. Keep in mind that you will have Social Security (FICA), Medicare, and federal and state income taxes withheld from your employees’ paychecks. You will also have to match the FICA and Medicare taxes and pay federal and state unemployment taxes.
· Know the tax laws of the different states that you sell product in (which is especially common since most of us do business over the internet). You may have to register with the state’s tax department and report taxable and nontaxable income.
· Some records you can toss after seven years, some you should hold on to indefinitely. Have your copies of business tax returns, licenses, incorporation papers, and capital equipment expenses stored in a safe place for as long as you own your business or until your tax preparer says it’s safe to toss. Keep any tax-related documents like expense receipts, client 1099 forms, and vehicle mileage logs for a minimum of seven years. The good thing is that most CPA firms now scan in all your documents or keep them on a cloud server for safekeeping. Less paper, less storage space, and preserved records are always a good thing.
· As an individual, April 15 is a date memorized only after December 25 and your own birthday. However, there are many other tax dates that you should fill in on your calendar. Estimated taxes are due four times a year: April 15, June 15, September 15, and January 15. Sales taxes are due quarterly or monthly, depending on the rules in your state. Based on the size of your payroll, employee taxes are due weekly, monthly, or quarterly.
· As a small business, you may have taken out a loan. Business loans are not considered business income. However, if your debt is forgiven you will have to pay taxes on this amount. On the plus side, the principal and interest you pay on your loan are business expenses and can be deducted once you report the amount of the loan and the assets and expenditures financed with this funding.
· Launching a business is expensive and those costs are considered capital expenses. You can deduct up to $5,000 your first year in business.
· As a small business owner, you may be taking classes or attending conferences to further your knowledge in your field. You can deduct educational expenses that maintain or improve skills required in your present employment which can include seminars, classes, and convention fees.
· You may want to classify an employee as a contractor to cut costs. Think twice before doing that because there are strict rules surrounding the proper classification of a worker and steep penalties for failure to apply the law properly.
· Use convenient electronic services like Intuit’s 1099 E-file that pre-fill business info and enable you to email or print forms. A great example is the 1099-MISC form if you’ve paid $600 or more for vendors such as subcontractors, attorneys, or accountants.
· Work from a home office? In general, you can calculate the deduction by multiplying the area of your home used for business by $5, up to a maximum deduction of $1,500.
This is just a small sampling of applicable tax tips for small businesses that you can apply to your needs. The best way to find all of your deductions and to prevent an audit from going south is to hire a business lawyer and CPA. While you can employ the services of franchised accountants in mini-malls for basic individual tax returns, you really should seek out a qualified professional to review your company tax return.