As a small business owner, you know that every penny counts. From one-time startup costs and buying new equipment to recurring rent and utilities, operating a small business can be expensive. Even more so when you end up overpaying on taxes. The following tax-saving tips will help you take advantage of deductions and manage your small business in a way that is efficient for tax purposes.
8 Tax-Savings Tips For Small Business Owners
- Implement a Filing System
- Deduct Startup Costs
- Deduct Your Home Office
- Donate Unused Inventory
- Hire Independent Contractors
- Take Advantage of Carryovers
- Deduct Business Gifts
- Determine if You’re Eligible for Penalty Relief
Implement a Filing System
One of the main reasons business owners end up claiming fewer deductions or paying penalties is simply because they waited until the last minute. Adding a few tasks to your weekly or monthly calendar can save you both money and stress during the tax season. For example, consider purchasing folders that allow you to label and file receipts, proof of payments, cancelled checks, invoices, deposit slips, etc. on a monthly basis. You should also save any other documents that support an item of income, deduction or credit included on your tax return.
Deduct Startup Costs
Many small business owners are unaware that any expenses they incur before the first sale are called “startup costs”, and startup costs are costly. The IRS allows small businesses to deduct $5,000 in business startup costs and $5,000 in organization costs, if your total startup costs are $50,000 or less. If startup costs exceed $55,000, you will not qualify for the deduction. If your costs fall between $50,000 and $55,000, the amount of the allowable deduction will be reduced by that dollar amount. For example, if your startup cost is $53,000, you would lose $3,000. You will be permitted to deduct $2,000 – not the full $5,000. Legal and accounting fees, licenses and permits, advertising costs, office rent and utilities, equipment rental, employee training and basic supplies are just a few of the startup costs you can deduct.
Deduct Your Home Office
One commonly overlooked tax deduction, is a home office. Many small business owners operating from a home office do not realize they can deduct expenses related to that home office (e.g. mortgage interest payments, insurance, internet service, repairs, utilities, etc.). This does involve spending a little time determining what portion of your home is dedicated to running your business. The IRS requires that you show you use your home as a principal place of business. However, if you use your home substantially but also conduct business at another location, you may still qualify for the home office deduction.
Donate Unused Inventory
Nonmoving inventory is a common problem for small businesses. Rather than storing unsold or unused inventory, you can donate the idle merchandise and receive a tax deduction instead. The tax incentive for sole proprietorships, partnerships and S corporations is a straight cost deduction; that is, if the fair market value of your item is $100, the tax deduction will be $100. If your business operates as a C corporation, on the other hand, a larger tax deduction might be possible. Keep in mind that donations greater than $500 will involve stricter reporting rules.
Hire Independent Contractors
Many new business owners cannot afford to hire employees at the very beginning. In addition to wages, they are required to pay payroll taxes and provide other benefits. Hiring an independent contractor means your business does not have to pay benefits or payrolls taxes. However, it is important that you know the difference between an independent contractor and an employee. While an independent contractor operates under a separate business name from your company and invoices for work completed, there are some cases where they legally qualify as employees. For more information on determining whether the individual is considered an employee or an independent contractor, you can refer to the IRS’ section on Independent Contractors or Employees. You should also note that, if an independent contractor received $600 or more from you in the year, you will need to issue them Form 1099-MISC.
Take Advantage of Carryovers
If you are a seasoned taxpayer, your history may impact your taxes going forward. Limitations and restrictions sometimes affect the ability to fully use tax breaks in the year they were generated but do allow for them to be carried over and used in future years. A few of the items include: capital losses, charitable contributions, net operating losses, home office deductions, investment interest, and general business credit. The key is to track these items – or use a software that will – so you do not forget about them from one year to the next.
Deduct Business Gifts
If you have given business gifts to reward employees or thank loyal customers, you can deduct all or part of the cost of the gift. Whether you gave the gift directly or indirectly, you are allowed to deduct up to $25 per person per year. You simply need to have records that prove the business purpose of the gift and provide details on the gift’s description and cost.
Determine if You’re Eligible for Penalty Relief
Even after following all of the necessary steps, you might find that you have incurred an IRS penalty. If this happens, be sure to research whether or not you are eligible for penalty relief. In some cases, the IRS will grant penalty relief if your inability to meet tax obligations is the result of circumstances beyond your control. Some of the penalties eligible for relief include: failing to file a tax return, failing to pay on time, failing to deposit certain taxes as required, among other applicable penalties. In addition, if you receive your penalty notice and are able to resolve an issue, you might be able to secure penalty relief.
While researching for ways to save money on your taxes, you can build a cash-flow forecast to estimate your tax impact and prepare your payments. A thorough understanding of your receivables and payables in relation to your budget and sales will not only help you during tax season, but also ensure your business thrives year after year. All in all, spending some time going over deductions and other tax-saving ideas will help you find alternatives you did not know existed.
Security Business Capital’s Cash Solutions Using Invoice Factoring
Two of the biggest challenges for businesses in tax season are accounts receivable/collections (51%) and cash flow (44%), according to the Small Business Accounting Report from Wasp Barcode Technologies. Our team at Security Business Capital specializes in helping companies secure the funds and services they need to operate smoothly and grow their business. Our invoice factoring services, for example, allow your business to leverage unpaid accounts receivable to generate cash quickly. Your business can also take advantage of assistance with tedious back office tasks, like managing billing and maintaining records.