40 Essential Tax Tips for Small-Business Owners
If you're a freelancer, sole proprietor, or small business owner, you're already doing multiple jobs to keep your business afloat. Being your own accountant and tax preparer just adds to the workload. However, if you know the tax rules -- even the odd ones -- and use them to your advantage throughout the year, it can lead to significant savings come tax-filing season. Here are just 40 tax moves that can ease the burden on established and burgeoning entrepreneurs.
It's easy for all of the little purchases and sales to become an unwieldy ball of receipts. Have a system in place to collect and organize all of your receipts, no matter the size. Even those little ones tend to add up.
We shouldn't have to remind freelancers, sole proprietors, and S corporations about this, but those April, June, September, and January payments are your way of staying in good standing with the IRS. However, business owners used to submitting W-2 forms from other jobs may need to acclimate to not spending or socking away the full amount on their paycheck. If you want to avoid penalties, it's best to owe less than $1,000 in tax after subtracting withholdings and credits. Beyond that, aim for paying at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.
Expenditures that directly help a business make money during the year count as business expenses and can be deducted that year. However, if you buy a building, a fleet of vehicles, or construction equipment, that's a capital expenditure that will benefit you for several years, but will depreciate over time. A tank of gas is a fleeting business expense, but the car it goes into has more lasting impact.
Under Section 179 of the Internal Revenue Code, business owners can write off the full amount of qualifying purchases, such as vehicles and computer software, in one year instead of depreciating them over several years. The annual value of this special deduction has varied, but it is $510,000 for 2017.
Did you buy new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year? Did you build oil derricks, warehouses, office space or, utility plants? Well, if you did so after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent of "expensing" from Sept. 27 onward. Recent tax reform also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" also applies to productions (qualified film, television, and or staged performances) and certain fruit or nuts planted or grafted after Sept. 27.
Want to get even more credit to go along with that depreciation? Make your business's car or fleet electric or plug-in hybrids. Despite fears that it would be eliminated, this provision still offers consumers and businesses that buy an electric or plug-in hybrid vehicle a tax credit up to $7,500. While this credit isn't going to be around forever, it's still a formidable tool for boosting sales of these fuel-efficient vehicles in spite of low gas prices and the market's hunger for less-efficient SUVs.
While charitable donations tend to work out better for individuals, who can deduct donations up to 50 percent of their adjusted gross income, businesses can get in on them, too. If you find yourself with surplus inventory, your business can donate it and deduct it. You have to maintain records of cash donations, but noncash donations of more than $500 and less than $5,000 require an extra form. Anything above $5,000 requires two separate forms, while donations above $500,000 require a full appraisal.
If you or your company owns stock, your business can donate those shares and deduct their current worth. If you bought that stock for $30 and it's now worth $130, you can deduct that $130 when it is time to pay your taxes. Not only is what you originally paid deductible, but any appreciation on that share value is deductible as well. Just don't sell those shares and donate the proceeds: You'll be on the hook for capital-gains taxes.
Yep, sole proprietors, self-employed workers, and freelancers can deduct the cost of health insurance premiums for themselves and their families. However, there are a couple of caveats: The deducted amount cannot exceed the total earnings of the business, and anyone with access to an employer-subsidized health plan, even through a spouse, cannot take this deduction.
Business owners and contractors with a high deductible health plan (HDHP) can put money into a health savings account. That money is tax-deferred, and the taxpayer will get a deduction for the amount contributed. If that money is used to pay for medical expenses, it's tax-free. In 2018, the maximum annual contribution limit is $3,450 for individuals and $6,900 for families (those 55 or older can contribute an additional $1,000 each year).
Section 105 of the tax code allows business owners to set up a medical reimbursement plan, health reimbursement arrangement, or other plan to ease the business's tax burden. If you or a family member is compensated as an employee of the business and submits medical expense receipts to the business, the business can reimburse you and turn non-deductible expenses into a legitimate business expense. It's tricky and often requires a professional to set it up, but it can save a business as much as $5,000 a year.
Small businesses with fewer than 25 full-time employees and average annual wages below $53,000 per employee can deduct up to half the premiums paid for employee healthcare. The business also must pay at least half of employee health insurance premiums and purchase health insurance through the small business health options program, aka the SHOP marketplace, to be eligible.
Businesses that employ fewer than 10 full-time-equivalent employees with average wages under $25,000 per person get the most benefit of the healthcare credit. If your business owes no taxes for 2017, you may be able to carry the credit forward to another year when you owe more. If you have some of that credit left over, you can claim business expenses against it.
Self-employed business owners can reduce their income for the year by contributing to SEP-IRA, SIMPLE IRA, or solo 401(k) retirement accounts. For 2017, the maximum contribution allowed is $5,500 for an IRA (or $6,500 for those 50 or older), $18,000 for a 401(k) ($24,000 for those 50 and over) and $54,000 for a SEP-IRA.
It won't save you the tax burden immediately, but a little bit placed into a Roth IRA each year can spare you the tax burden on investment growth later on. Though you'll have to pay taxes on that income this year, income placed into a Roth IRA grows tax-free until you reach age 70.5. As with a traditional IRA, the annual limit for a Roth IRA contribution is $5,500, or $6,500 for those 50 or older.
Unlike deductions and credits, these are ways to save money by maneuvering around the tax laws themselves. In this case, there are ways to structure your business that avoid the FICA hit. If the business is an S corporation, the owner must take a competitive market-rate salary that will have FICA taxes taken out. Profits beyond that may be exempt from FICA taxes.
If you're a sole proprietor, you can hire your kids as help. If that child is younger than 18, you do not have to pay FICA. If they're under 21, you don't have to pay federal unemployment taxes. The upside for kids is that they get a job and spending money that isn't an allowance. The downside is that they may need to file a tax return if their earned income is more than the standard deduction, which is $6,350 for 2017 income.
It's another benefit of child labor, but one worth noting. If a business owner makes $60,000 in income a year, that will be taxed in the 25 percent bracket. However, if that same business owner hires a son or daughter and pays them $30,000 of that income, that $60,000 will be taxed at 15 percent in a lower bracket. Instead of paying for an allowance, tuition, or utilities, that child can pay for all of that themselves, learn some financial lessons, and save the entire family a huge tax hit.
In the same vein, business owners can also hire grandchildren and keep money in the family while lowering their tax bill. This is your opportunity to bridge the generation gap a bit and have them take photos for ads and social media profiles, set up your online presence, and make your whole operation a bit less analog.
Start-up businesses are costly. In the first year alone, there are expenses for basic supplies, equipment, meetings with potential investors, incorporation, advertising, utilities, and more. New business owners can deduct up to $5,000 for business costs and $5,000 for organizational costs. If costs exceed profits the first year, the remaining portion can carry over to the following years. However, these write-offs taper off once start-up costs exceed $50,000.
If your business is an S corporation, partnership, LLC, or sole proprietorship, you can deduct losses immediately on your personal income tax return, offsetting other sources of income. With a C corporation, however, losses may have to carry over to the first year you have a profit. Just don't rack up too many losses: If your business looks more like a hobby, you can't use your losses to offset other gains.
Fees paid to tax professionals, lawyers, and other consultants hired on a one-off or ongoing basis can be written off. Sole proprietors can write off only the costs that exceed 2 percent of their adjusted gross income.
Business owners studying a subject relevant to their business can write off the cost of books, classes, and professional publications. The subject does not need to be related directly to the services the business provides. For example, classes on tax preparation or management techniques could make the grade.
This one is tricky, as simply working on the couch or at a kitchen table doesn't cut it. Your home office has to be a dedicated space for working and meeting clients and customers. While you can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office, a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller).
If you take the home-office deduction, a portion of the utility bill, including Internet access, is deductible. Utilities at conventional offices are also deductible as business expenses.
Business owners can deduct the cost of using their vehicle for business reasons in two ways. They can deduct the actual costs, including depreciation (there are calculators for this), of using the vehicle for business. Or, they can claim a standard mileage rate – 53.5 cents per business mile in 2017. However, they must keep a detailed log when claiming the mileage tax deduction. Parking and registration fees, tolls, and taxes may also be deductible.
Nope, you can't deduct your commute. However, if you're going from your first job to a second job, that might be deductible at the standard business mile rate. In addition, driving for business-related medical reasons, moving, or to donate items or volunteer are deductible driving expenses. The standard mileage rates vary: 17 cents a mile for medical and moving and 14 cents a mile for charitable causes for 2017.
Business expenses related to travel can be deducted. You just need to be organized about it. Keep receipts for everything: hotels, cabs, etc. And please don't combine a business trip with a vacation: That's begging the IRS for an audit.
Even when traveling for work, business owners can deduct only half the cost of meals. However, they can opt to deduct half the government's per diem rate for meals and incidentals instead of the actual amount. This means a deduction as high as $37 a day, even when spending less than that. In either case, hang onto receipts.
For TV personalities, bodybuilders, and other professionals whose appearance is directly related to their livelihood, grooming essentials such as body oil and makeup may be tax-deductible business expenses.
Many tax rules depend on how a business is structured and how its contracts are written. Speak with a tax professional or an attorney before implementing any complex tax sheltering strategies on your own.
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