The Small Business Administration (SBA) is a federal government agency that helps small business owners get connected with resources, small business loans and other beneficial advice and information for how to run a business successfully. But aside from their other areas of expertise, the SBA also offers a few helpful tax tips for small business owners.
This tax season, be sure to listen to the SBA’s advice on how to minimize your tax liabilities and avoid problems with the IRS. Here are five helpful tax tips from the Small Business Administration:
- Don’t Forget the Basics
When preparing your taxes, nothing is more important than keeping good records. Without accurate records of profit and loss, business expenses and eligible tax deductions, you can’t estimate your tax liability, your accountant can’t give precise and professional advice and in the event of an audit, you can’t prove your expenses. After investing the time and energy to keep your records straight, don’t be too quick to throw them away. Keep your records for at least seven years. If you use accounting software to balance your books and track business expenses, make sure you have a backup of your data.
- Don’t Mix Business With Pleasure; At Least Not On Your Tax Return
One aspect of keeping good records for your business is to be sure to keep business expenses separate from your personal expenses. If you don’t already have a separate business bank account and business credit card, get one.
Keeping business expenses separate from your personal finances makes it easier for you to track your business expenses and save money at tax time. If you buy new office equipment or a new laptop with your personal credit card, it’s all too easy for that expense to get lost in the shuffle and not end up listed on your itemized deductions. Tracking business expenses separately from personal expenses helps you minimize your tax liabilities while saving time and effort.
Also, if you have a habit of intermingling your personal spending with business spending, this could be a red flag for an IRS audit. The IRS is especially attuned to personal expenses that may have been incorrectly claimed as a business expense. Using the company-owned car to pick up your groceries? Spending money on a nice family vacation and calling it a “business trip?” The IRS is on it. Make your life easier by using separate bank accounts and credit cards for your business and personal expenses – and you’ll likely have a more financially successful business and a more peaceful (audit-free) personal life.
- Ask for Help
Between the tax code, tax regulations and IRS rulings, the federal tax rules span 73,954 pages. America’s tax system is way too complicated for most people to understand, especially if they are small business owners who have to deal with all of the extra complexities and regulatory obligations. So get an accountant to help do your taxes.
A good small business accountant can be a lifesaver in a number of ways. Your accountant can help make sure your tax returns (business and personal) are filed accurately and on time, they can help file quarterly payroll taxes and make sure you are on track for your yearly estimated tax payments, they can help you deal with sales tax and other tax collections, they can help you answer questions along the way about the various particularities of your tax situation and they can help you avoid red flags that lead to an IRS audit. Yes, it costs money to hire a good accountant – but their help is almost always worth more than it costs. A good accountant can help put more money in your bank account and make tax time a relatively stress-free season for years to come.
- Take Advantage of Recent Legislation
Every year there are a variety of changes to federal legislation that might affect your business and your tax return. For example, according to this article in Forbes, for 2016 Congress has made a number of changes in tax policy, such as:
- SIMPLE IRA Rollover: Small business owners will now have the option of rolling over previous 401(k) plans or other employer-sponsored retirement plans into their SIMPLE IRA.
- $2,400 Tax Credit for Hiring Long-Term Unemployed: If you hire someone in 2016 who had been unemployed for 27 weeks or more, your company will receive a $2,400 tax credit.
- State and Local Tax Deduction Made Permanent: This tax break – which was just made permanent – allows taxpayers to claim an itemized deduction for state income taxes or state sales taxes paid during the year.
Also, some recently enacted provisions of the Affordable Care Act (“Obamacare”) now provide tax credits that enable qualifying small businesses to get a tax credit for up to 50 percent of the health insurance premiums that they pay for their employees. The details are complex and your company needs to meet certain conditions to qualify, but check out this page on the IRS website for more information.
Be sure to talk with your accountant about the latest changes to tax laws, and how you can put your business in position to maximize your tax savings.
- Avoid Common Audit Traps
Going through an IRS audit is never fun for anyone, so it’s best to avoid putting yourself in that position in the first place. With careful planning and attention to detail, you can avoid some of the most common IRS audit traps:
- Classifying Employees as Independent Contractors: If you have employees working for your business, it’s important to make sure you are classifying their work status correctly for tax purposes. Many businesses mistakenly (or deliberately) misclassify their employees as independent contractors in an attempt to save money on taxes – but there are labor rules differentiating one type of worker from another, and there are big consequences. If the IRS finds that you have misclassified your workers’ status, they will assess back taxes and penalties.
- Improper Home Office Deductions: Not all home offices qualify for the home office deduction. For starters, your home must be your principal place of business and you must regularly use part of your home exclusively for conducting business. And you can’t claim your entire home as a deduction – just the percentage of square footage that is dedicated exclusively to your business. The IRS has more information on their website, but you will want to consult a professional to make sure your home office qualifies – overstating your home office deduction could lead to paying extra taxes and penalties.
- Large Sum Miscellaneous Deductions: Thinking about claiming $50,000 worth of deductions on $50,000 worth of income? Yeah, that’s not going to work. If you claim a large number of itemized deductions or miscellaneous expenses relative to your income, the IRS is going to have lots of questions and they’re going to ask them during an audit.
So, in sum: keep your files in order, stay up-to-date, and consult a professional tax adviser to avoid playing fast and loose with the federal government’s rules and regulations. With the right tax advice and careful planning, you can spend less time and money on your taxes, and spend more energy dedicated to growing your business!
What’s the best small business tax advice you’ve ever received? Leave a comment and let us know.