As we near the end of 2019, we figure it’s never too soon to offer up 9 tips that may help ease your small business’ tax burden on your upcoming returns.
KEEP A CLOSE EYE ON ALL RECEIPTS
Receipts create the financial dashboard of how you spent your money throughout the year. Many of those receipts are for goods and services that can be deducted on your taxes, offsetting taxable income. Depending on your business structure, there are specific deductions you can take for certain structures, plus deductions that apply across all structures. Of course, keeping receipts for an entire year is a hassle; many pieces of paper get misplaced or tossed.
PAY FOR YOUR RETIREMENT NOW
A self-employed worker’s taxable income can be reduced by putting additional money toward a traditional retirement account — the money isn’t taxed until the funds are withdrawn in retirement. Small business owners under 50 can contribute up to $5,500 (per taxpayer) to a traditional or Roth IRA; those over 50 can put up to $6,500 toward their retirement savings.
DEDUCT YOUR HOME OFFICE
Many small business owners operate from offices at home, but not all of them realize they can deduct expenses related to that home office. These can include insurance, mortgage interest payments, repairs and utilities like internet service.
You do, of course, have to determine what portion of your home is dedicated to running your business (the tax software does the mathematical calculation for you), but this deduction can benefit both homeowners and renters.
DEDUCT YOUR CAR EXPENSES
The trick here, again, when you’re deducating expenses, is to calculate what percentage of the time your car is being used for work. From there, you can apply that percentage to your overall car expenses.
For this category of deduction, two types are available: the IRS’s standard mileage rate or your actual car expenses (including insurance, gas, and repairs). Figure out which one makes the most financial sense before filing so you can maximize your savings.
USE YOUR BUSINESS EQUIPMENT AS MUCH AS YOU CAN
Section 179 allows small business owners to avoid tracking depreciation by treating equipment as a business expense in the year it was purchased (with an upper limit of $500,000). Business equipment encompasses anything a small business owner may need to run a business, from an industrial-grade oven to office furniture to computer items.
A Section 179 calculator can help you determine how much you can save by taking the “lump sum” approach; keep in mind that Section 179 doesn’t automatically kick in. You must file a Form 4562 to elect it.
HIRE FAMILY MEMBERS TO WORK FOR YOU
If you have family members who can help with tasks essential to your business — say, a teenager who can help mow lawns as part of your lawncare business — you can add tax savings to the benefits.
Hiring a family member means you can take a business deduction for reasonable compensation paid to that person (lowering your taxable income), and it can also result in your being able to avoid taxes such as FICA and FUTA.
KEEP AN EYE OUT FOR CARRYOVERS
Some deductions or credits may not be fully used in one tax year and are eligible to be carried over into future years. These can include items like capital losses, net operating losses, home office deductions and charitable contribution deductions.
Track these (or have your software do it), so you don’t forget them from one year to the next.
DON’T SELL YOUR OLD EQUIPMENT
If you want to get rid of property that’s no longer providing ROI to the business, find out whether it would be better to abandon it (an ordinary loss) or to sell it (a capital loss).
An ordinary loss is fully deductible, so find out how your property may be classified under Section 1231 to determine how you should rid yourself of it.
TAKE ADVANTAGE OF PENALTY RELIEF IF YOU CAN
Despite following these steps and/or the recommendations your accountant makes, you may incur an IRS penalty. If that happens, you need to determine whether you’re eligible for penalty relief.
Some penalties, such as penalties for failing to file a tax return or to pay on time ,are eligible for penalty relief. People who can be considered for relief include those who tried to follow the legal requirements but were unable to meet them due to circumstances beyond their control, or those who were able to resolve an issue pointed out in their penalty notice. Not everyone in these two groups qualifies, but it’s worth finding out whether you do. And that’s money back in your pocket for an honest mistake.
You don’t need to make small business ownership more financially draining than it already is. By carefully accounting for deductions throughout the year and investigating your options in tricky situations, you’ll find alternatives you didn’t know existed — and savings you can really use.