Money-saving tips to help you prepare for tax time
Don’t wait for tax season to start planning and budgeting for taxes. As your business makes money, you’ll need to stock away savings now to stay on top of your tax payments. Fortunately, we have money-saving tips to help you meet deadlines, avoid tax audits, and get the most out of business tax deductions.
After all your hard work, you’ve finally turned your entrepreneurial dreams into reality. Your small business is earning a profit, and that’s great news! There’s just one tiny downside: you’re now on the line for paying more in business taxes.
While the opportunities to generate more income are endless, it’s critical that entrepreneurs track their filing deadlines and make their estimated quarterly payments on time to avoid any tax trouble.
When you’re running a business solo, you essentially take on the responsibility of paying business taxes on your own. Currently, small businesses across entity types pay an average federal tax rate of 19.8% on income earnings. Falling behind on your tax obligations can leave you with messy consequences. In fact, you could be at risk for an IRS audit, paying back taxes, or getting socked with hefty tax penalties that could eat into your profits.
Luckily, there are some steps you can take throughout the year to help save you money, stay on top of quarterly payments, and help you prepare for the next tax season. Read on to learn ComplYant’s top four tips for seizing control of your business taxes.
| For small businesses and entrepreneurs, tax time isn’t limited to a once-a-year event.
#1 - Consider using budgeting or tax filing software
Most small businesses struggle to understand business tax. In addition to taking the time to learn the ropes about business tax, many entrepreneurs find it helpful to use popular tax and accounting software to accurately track finances and tax obligations. User-friendly accounting software and tools such as ComplYant can help business owners prepare for tax time and budget for tax bills.
Accurate reporting is critical if you want to get the maximum savings possible, and it can help you easily keep business and personal expenses separate and accounted for. Maintaining these details in your records can also serve as an extra layer of protection if you are charged any erroneous fees or penalties, or fall under an audit. You’ll be able to “show your work” and account for every dime that has come in or gone out of your business.
There are also apps designed to help you keep records of your receipts, invoices, and other documents to account for money spent and received throughout the year. Keeping these receipts also allows you to claim deductions for qualifying goods and services to offset your taxable income.
#2 - Uncover small business tax deductions
Want to know the best path toward tax savings? Take advantage of small business tax deductions. There are many common tax deductions for small businesses, and while rules can vary for sole proprietorships, C-corps, S-corps, Partnerships, and LLCs, business owners should consider these common deductions and evaluate if they apply to their business.
- Startup and organizational costs – For the first year of your business, you can usually deduct up to $5,000 in start-up costs if you’ve spent $50,000 or less in total. The balance over that initial $5,000 must then be capitalized and amortized over several years, as detailed in chapters seven and eight of Publication 535.
- Day-to-day costs of running your business – Things like office supplies, employee salaries, rent, utilities, and maintenance of your business property are generally deductible. If you often travel for business, the expense of these trips could also be deductions, and it’s worth tracking your mileage if you have a vehicle for your business as the IRS allowed businesses to claim 62.5 cents for each mile driven for business.
- Depreciation and debt – If the business lent money to an employee or if a customer didn’t settle their account, that money can be claimed as “business bad debt.” Businesses that use machinery can claim depreciation costs over several years.
- Advertising and gifts – Employees can be given gifts up to $25 per year, per employee, that are fully tax-deductible. In some cases, gifts to clients or would-be clients are also deductible. Marketing and advertising efforts, like hiring a freelancer to design business cards, running social media ads, or sending one-sheets to potential customers, are often potential deductions.
To get the most out of your tax deductions, take the time to store or review your receipts and clean up your books. An accurate bookkeeping system can provide proof of the deductions you claim and protect your deduction claims in the event of an audit.
As a general rule, any business expense is tax-deductible, if it is ordinary and necessary. By definition, an ordinary expense is one that is common and is generally accepted as an expense in your trade or industry. A necessary expense is defined as an expense that is helpful and appropriate for the trade or business.
These definitions may feel a bit murky and can seem even more confusing in light of tax rules changing every year. Because of this, it’s important to check deductions annually to be sure they’re still applicable. You might consider working with a tax professional to help you manage any tax changes and adjust your plan for paying taxes throughout the year.
#3 - Avoid audit pitfalls
One of the most stressful experiences for a small business owner is being pulled for a tax audit.
Even if the process doesn’t result in owing additional money back to the government, the process itself can cost you a lot of time and money as you respond to the auditor’s request, attend meetings, and perhaps request the services of a CPA, attorney, or other tax professional to represent you through the audit.
One way to help protect you or your business in the event of an audit is to have accurate bookkeeping and organized and documented receipts. A better strategy, however, is to avoid an audit in the first place. There are a few steps you can take to minimize your chances of being selected for an audit.
- Don’t take large “miscellaneous” deductions. Beware of making too much use of “other” or “miscellaneous” categories when reporting deductions in your accounting software or bookkeeping process. Using these categories can raise suspicion that you are padding the numbers to avoid taxes.
- Use caution when claiming a home office deduction. More people are working from home, so this deduction is no longer likely to raise eyebrows with the IRS. However, there are strict rules about this particular deduction, so be sure to research this deduction before deciding if you will use it.
- Be as accurate as possible when claiming things like business mileage. Generally, the IRS requires detailed and accurate records for business driving, including records of time, date, distance, and the purpose for each drive. If numbers are too general, the IRS will suspect that adequate records were not kept.
- Beware of classifying employees as independent contractors. If you don’t correctly classify the people who work for your business, it can lead to penalties down the road. Some business owners may try to claim employees are independent contractors to avoid employment taxes, but tax laws and common law rules dictate who must be classified and paid as an employee.
#4 - Mark your calendar with important tax deadlines
For small businesses and entrepreneurs, tax time isn’t a once-a-year event. Instead, there are several deadlines throughout the year that need to be addressed. Businesses need to manage quarterly estimated tax payments, file sales, complete payroll tax returns, and issue W-2s or 1099s if the business has other employees or contractors.
In addition to federal deadlines, businesses also need to keep in mind any state or local deadlines that may apply to them. Make sure you know which deadlines apply to you, and mark them down. Not missing a deadline can help you avoid penalties and headaches down the road, so making a point to keep these deadlines in sight is vital to your business.
You can automate some of this work by using business tax platforms like ComplYant, which provides custom tax deadline reminders, helps businesses budget for taxes, and is user-friendly for both entrepreneurs and small businesses.
Don’t wait for the end of the year or for tax season to start planning and budgeting for taxes. Instead, start early. By leaning on business tax resources and beginning your preparation and planning early in the year, you can create a strategy to make taxes more manageable. Begin implementing budgeting software, track deadlines, and research potential deductions to maximize the amount of money you and your business can save.