By the Small Business Computing Staff
There's no sugar-coating it; pulling together last year's receipts, deciphering the tax code changes du jour, and worrying about what you'll owe and how you'll pay it make the weeks leading up to April 15 stressful for you. It's even worse for your accountant—and downright unbearable if you are your accountant.
While we can't help you avoid all the tax pain, we can offer tips and resources to alleviate it somewhat. Here's what small business owners can do to pay a little less money this time around, while laying the groundwork to make 2014 and beyond less taxing in every sense of the word.
Pay Less Money this April
Unless you've got a 1981 DeLorean equipped with a flux capacitor, you can't undo what you did in 2013. But you can still look for deductions for which you do qualify. We spoke with Jessie S. Seaman, head of the business tax team at the Tax Defense Network, who points to four important credits and deductions that could apply to many small business owners. The Tax Defense Network's team of licensed tax professionals, enrolled agents, attorneys and CPAs has resolved more than $120 million in tax debt for clients.
Figure 1: The IRS Small Business Tax Center
While most business owners know about the home-office deduction, Seaman notes that travel expenses to and from home are also deductible if indeed the home is your place of business. "When you leave home and travel to different locations for business purposes, all the travel is deductible," she notes. "Be sure to keep a log and records so that you can deduct the standard mileage rate or actual expenses." Another interesting tidbit: If you are self-employed, any baggage fees incurred when you fly for a business trip are also deductible.
In addition, be sure to deduct any state sales tax paid on business purchases, since it is fully deductible. This can be especially lucrative if you've had big-ticket purchases such as vehicles and equipment. And for 2013, you can deduct 50 percent of the cost of qualifying equipment (such as PCs) in one year, rather than spreading the depreciation over 5 years. Seaman also notes that businesses can write off interest paid on credit cards, loans, overdue bills or account payables, and even bank fees such as insufficient funds fees or monthly surcharges.
And if you did any hiring in 2013, double check to see if that employee is a veteran. The Work Opportunity Tax Credit is available to businesses that hired veterans for the first time. Since the government can't make anything that straightforward, you must look at additional guidelines to determine if you are eligible, and employers must file Form 8850 with their state agency to get certification.
Tax Prep for April 2015 and Beyond
The key to any tax deductions, of course, is good record keeping. The IRS suggests that business owners keep records that show total revenue and proof of purchases for business expenses for a five-year span. Too often, an audit of one tax year grows—at the auditor's discretion—to include several tax years. The IRS does not require you to follow any special method for keeping records, but they state it's a good idea to keep them organized and in one place.
A tool like Deductr can help you do that. This online service and associated mobile app can help you stay organized and summarize all your records in one place. In Deductr you can confirm income and expenses, log mileage, record time spent on your business and more. Plus, there's the opportunity to record notes and details—something you can't do with a shoebox of receipts or old bank statements.
Figure 2: Deductr can help you keep your records organized and in one place.
All of these things help support your deductions and jog your memory in the event you are ever audited. And if you're tired of guesstimating your business mileage, Deductr can help you track it exactly: The mobile app uses the GPS in your smartphone to track your mileage, so you can write off every penny of the 56 cents per mile the government allows.
Deductr can also help you navigate the often-tricky home-office deduction. Keep in mind that you can write off only the expenses relating to the portion of your home used for business (and exclusively for business). So, if you have a 2,000-square-foot house and 200 square feet of it is used for your business, you can write off 10 percent of your property taxes, utilities, improvements that impact the whole house (like a new roof) and so on.
However, you cannot deduct more than the net profit you earn from your business. If you are making a profit, this won't pose a problem; if your business earns very little or loses money, the amount you can take could be limited for that year. But if the amount you would deduct for your home office exceeds your profits, you won't lose that deduction forever. You can deduct the excess in the following years. Confused? Deductr helps with this. Its Home Office report includes a line "Business Profit before home office deduction." That way, you will quickly know how much of the home office deduction you can take this year.
The experts at TaxJar recommend other ways to minimize your tax burden going forward. The service offers easy sales tax reporting for ecommerce sellers, such as those with storefronts on eBay and Amazon.com.
When you connect your business to TaxJar, it imports your ecommerce business' sales history for last year. In addition, it goes back and calculates what you should have collected, for each and every order, based on the location of your business. This tool takes care of all the nexus determinations for ecommerce, as well as rules for whether a state requires rates based on either the origin of where you ship or on the shipping destination.
TaxJar points out that one way sellers can minimize their tax burden is by scrapping old inventory. If your business has unsold inventory that you expect won't sell, either throw it away or donate it. By doing so you can write off the cost of those expenses, reduce your profits, and hence reduce taxes.
Owners should also consider setting up a Simplified Employee Pension (SEP). By establishing an SEP, you can sock away some of your profits for retirement and save money on taxes. Better yet, your contributions can come from pre-tax earnings. And one of the lesser-known benefits of an SEP is that you can still make 2013 contributions up until the time you file your taxes, so it's not too late to cut last year's taxes.
Tax-time Resources for Small Business
Whether you do your business taxes yourself or have an accountant complete them, the best weapon in your arsenal is knowledge. Keeping abreast of tax-code changes can help you make adjustments and reap every credit and deduction you can. The best place to start is IRS.gov, and specifically the Small Business and Self-Employed Tax Center area of the site. You'll find a synopsis of changes for the given tax year, forms, webinars on topics pertinent to small business owners as well as an A-to-Z index of topics.
Figure 3: American Express Open Forum tax resources.
Another welcome resource is the American Express OPEN Forum, with its area dedicated to tax issues for small business owners. This online community of all things small business includes more than 200 articles relating to small-business taxes, including:
- 7 Red Flags That Could Get Your Small Business Audited
- How to Breeze Through a Tax Audit
- Audit Nightmares: How to Cope When the IRS Comes Knocking
It isn't the slickest looking site on the Web, but Small Business Taxes & Management is a clearinghouse for all things tax related. Here you'll find links to special reports and news articles related to tax topics, IRS quick links, a reference section (including links to depreciation tables, explanations of abbreviations, tax formulas, and much more) and articles on recent legislation. Be sure to check out the News and Tip of the Day items, as well as the to-do list calendars for federal and state taxes.
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