Help your small business clients navigate tax season this year
It’s the most wonderful time of the year! Well, not exactly. Tax time can send many small business owners’ blood pressure soaring with concerns over losing hard-earned money, filing on time, or worse yet, being audited. The good news is that with a little advance planning and organization, not only can they stay out of financial hot water this tax season, but they can also save their small business significant money. Producers, share with your small business clients our 10 tips for beating Uncle Sam to the punch:
1. Plan, plan, plan: As the old saying goes, “An ounce of prevention is worth a pound of cure.” Try to have a good idea of where you’ll end up financially for the year as you’re starting the fiscal year. Look back at prior years to determine how you’re trending towards estimates looking ahead, especially if you pay estimated taxes throughout the year. Ideally, you would sit down with a tax planner at the beginning of the fiscal year to find out which expenses are deductible and to learn how to make business choices affordably. Gaining a clear tax understanding before spending the money is key to maximizing the amount you keep.
2. Understand your business: What type of business are you, and what does it matter? When it comes to taxes, it very much matters. How you set up your business can have a significant impact on the taxes you pay, since each type of business has its own unique tax requirements and implications. For example, LLC profits are taxed at the ordinary tax rate, while C-corporations are taxed at the corporate rate, then again when they report distributions on their tax returns, known as double taxation. Educate yourself on the different types of business structures and which one makes the most sense for you, including which will save you the most money on taxes.
3. Keep exceptional records: No more stuffing faded receipts and bank statements into random (and easily misplaced) folders or desk drawers! Sloppy or incomplete record keeping is one of the biggest issues accountants run into with small businesses. It is vital and well worth investing in reliable accounting software that keeps year-round records to help make tax filing more efficient and less prone to errors. If you prefer not to invest in accounting software, at the very least set up an accordion file with an expandable folder for each month of the year. Then organize all receipts, deposit slips, ATM withdrawal slips, etc., into their respective folders.
4. Know who works for you: By that we mean it’s important to know whether you’ve hired employees or contractors to help build your business. Many small businesses intentionally hire independent contractors in order to avoid having to pay mandatory payroll taxes or benefits. However, it’s important to understand the true definition of an independent contractor. If your contractor in fact meets the legal definition of an employee yet isn’t receiving any of the perks of being an employee, you could face IRS penalties.
5. Record deductible expenses: A good general rule is that any expenses related to your line of work or to improving your line of work are deductible. Some of the more obvious write-offs include any business meals with clients or while traveling for work; any mileage you put on your car not only for business, but also for medical appointments or charitable purposes; and any home office supplies, including deducting your actual workspace. Less obvious deductions include any training or continuing education, professional association dues, or periodicals to which you subscribe.
6. Track interstate travel: This merits its own category since it’s one of the areas that causes the most tax confusion. Even if you operate your business in one state but often travel to other states, those other states may require you to file returns there. Some only require you do so if you worked there for over a week, while others require you to file if you’ve worked there for as little as one day. Keep a record of your travel dates, location, and amount of time you spent there down to the hour. Doing so will spare you (or your accountant) hours of headache down the line.
7. Donate any unused inventory: Rather than spend the cash to store any unused or unsold inventory, donate it and benefit from the tax deductions instead. Business money donations, supplies, and property are all deductible expenses. Just be aware that any donations valuing more than $500 have stricter reporting rules.
8. Set up a retirement plan: A corporate retirement plan can provide several tax benefits for you, your business, and all those who work for you. A few benefits include writing off employer contributions, no tax on any asset growth, and the ability to attract and retain valuable employees.
9. File on time: Make sure to do everything in your power to file your taxes on time. If you fail to file on time or pay any taxes owed (plus interest), you may be subject to significant tax penalties.
Related: Last-minute 2016 tax tips
10. Hire help: Although your business may be small, the tax regulations for even companies of this size can be dauntingly confusing. If you feel in over your head, or simply want to solely focus on business development and not be head down in the day-to-day spreadsheet and expenses, you’re by no means alone. That’s where an experienced tax professional who can help you understand your obligations makes sense. A qualified CPA is not only more affordable than you think, but also understands taxes and tax laws forwards and backwards, including how to get you the most favorable tax deductions and benefits. Hiring a professional will typically save you at least as much as the fee they charge, plus you get the added bonus of resting easy knowing your returns were prepared and filed properly.
Producers, do you have not only small business clients, but also new small business clients? Stay tuned for our financial checklist for new business owners.