Business lady working with financial documents on her desk. Concept: tax tips
Maria Arnedo
By: marnedo
Read in 14 minutes

10 Tax Tips for Business Owners

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As the deadline to submit your business taxes approaches, you still have time to take some actions to ensure a proper filing. We bring you here 10 tax tips that can save you time and the occasional headache when you decide to get your taxes ready this year. Moreover, these simple actions can save you money and ensure a more profitable return. But most important of all, they’ll guarantee you comply with the regulations regarding tax filing to avoid any future complication or even an IRS audit. It’s never too late to learn ways to save time, money and problems when preparing your business taxes!

10 Tax Tips to Get Ready to File Your Taxes

Tip #1. Keep your receipts and track your expenses

One of the biggest mistakes that small businesses make is not keeping up-to-date financial records, which also includes all the receipts related to business expenses. Proper record-keeping and expense tracking are the first steps towards accurate tax filing. As a business owner, you need to be very diligent throughout the year by asking for, keeping and organizing receipts for all types of transactions related to your business. Buying lunch for the staff, taxi rides, gas for business vehicles and purchasing toner cartridges all need to be accounted for properly. Small expenses don’t seem like a big deal, but they add up quickly: the average small business owner generates hundreds if not thousands of dollars in small expenses through the course of a regular year.

Having your receipts in order when tax time comes will save you time and potentially a lot of money. Saving and filing your receipts sounds like torture? Don’t worry: the times of keeping every single piece of paper in a shoe box are long gone by. Simply use an expense tracker app to do the job for you. Remember that properly tracking your expenses has other benefits too: it helps you gain knowledge about your business, and it can help you decide if it’s time to take a loan.

Tip #2. Register your business

If your business structure or business legal entity is not established yet, do it as soon as possible. Maybe you are paying way too much on self-employment tax. The best solution is to establish your business entity. Filing articles as soon as possible during the year is a sensible and economical small business tax-savings strategy as some states impose franchise taxes and fees at the beginning of the year. You can establish your business as a sole proprietorship, corporation or LLC. Don’t know which will be the best fit for your business? Learn here the differences between these 3 types of business structures.

Remember that legally structuring your business has some other benefits: most business lenders will ask for proof of business registration as one of their requirements.

Tip #3. Get to know all your potential deductions

The bad news is you have to pay taxes; the good news is there are a lot of tax deductions available for small business owners. They can considerably- and legally reduce your tax burden, but you have to know these deductions and how you can use them to your advantage. This can be the key to a successful tax return.

You have to make sure that every item you write off as a business expense can be included as a deduction. Some items seem pretty straightforward: supplies, equipment, or software you have purchased during the tax year, are deductions. A car you have purchased for a family, clearly is not. Other items are more complex, like clothes: unless it’s a uniform you have to wear for work or a form of protective equipment, clothing or shoes you buy for work aren’t deductible.

Also, be cautious with large-sum deductions. You may think it’s a good idea to claim a large number of deductions in order to reduce your tax liability, but the IRS will likely flag your return if these are beyond what is typical bucketed. If you do happen to have a vast array of deductions equaling a large sum, make sure you are as specific as possible and label each deduction (and again, make sure you keep the receipts that back up these expenses!). The IRS carefully reviews the deductions in search of these red flags, so if you are not sure of what you can deduct and what not, your best bet is to consult with an accountant or tax preparer.

Tip #4. Separate business expenses from personal expenses

This is essential to keep an accurate record of those expenses that can be deducted from your taxes. The best way to keep business and personal expenses divided is by maintaining a separate bank account and separate credit cards for your business. Just use your common sense when deciding when to use your business credit card or your personal one. Do you know the said, “never mix business with pleasure”? It perfectly applies here: if you are going to a seminar related to your industry, buy your plane ticket with your business credit card and use it in your taxes as a deduction. But if you go to have a drink with your seminar buddies once the course is over, simply pay with your personal credit card.

Once it’s time to file your taxes, ensure that your records specifically separate your business expenses from your personal expenses. And remember that you shouldn’t separate your business and personal accounts merely for tax purposes: having a business bank account is one of the basic requirements to apply for a business loan and it’s also the first step to building your business credit and thus opening your company to new opportunities.

Tip #5. Start a savings account for health-related issues through the business

Too often the concept of getting a tax deduction on a health savings account doesn’t cross your mind. Any contribution to a health savings account is tax deductible, and there are no limits to the amount of money contributed to the plan. The type of savings plan (individual or family) will determine how much of the contribution is eligible for deductions. Funds from your health savings account can be used to pay for qualified medical expenses without being taxed.

Tip #6. Buy a vehicle or get the most out of your existing one

As many business owners know, the mileage you cover for business purposes is tax deductible. But what you may not know is this: if you use a truck or commercial vehicle for your business, you should consider purchasing one that weighs more than 6,000 pounds. The deduction for depreciation can be quite a tax saver, depending of course on the cost of the vehicle itself and the business use percentage.

If buying a new truck is not part of your plans, then get the most out of your vehicle and fuel deductions. The federal government allows two different types of vehicle-related deductions. The standard method allows for 54 cents per business mile plus parking and tolls. The actual method adds up all vehicle-related expenses (oil change, car insurance, gas, car washes, miles, and repairs). You need to determine which of these deduction plans will work best for your company. As always, keep all vehicle-related receipts and use a company credit card to purchase these items. Bear in mind that driving from your house to work is not tax deductible!

Tip #7. Classify your employees properly

If you misclassify your employees, the IRS may view it as a desperate attempt to avoid paying payroll taxes. Make sure you know the difference between independent contractors or freelancers (considered a deduction) and employees. A mistake here could cost your business harsh penalties and back taxes. The rise in this type of fraudulent behavior was seen after employers chose to classify their employees as independent contractors when the economy tanked, so you can be sure the IRS will pay special attention to this point.

Tip #8. Include your children and spouse on payroll

However, this option is totally viable. Most small business owners don’t realize that paying your children for services is a tax-savings tool. For example, if your child is less than 18 years old, and you are a sole proprietorship or single member LLC, your business is not required to withhold payroll taxes. Additionally, your child can use the standard deduction against any income you pay, since that sum is earned income and does not require income taxes.

You can also add your spouse on payroll the same way but only do it if he or she wants to contribute money to your company 401(k) for tax-planning purposes. Otherwise, generating earned income for your spouse and subjecting it to payroll taxes would not make sense as that deduction will end up on your joint return anyway.

Tip #9. Know your tax bracket

Tax brackets show you the tax rate you will pay on each portion of your income. For example, if you are single, the lowest tax rate of 10% is applied to the first $9,525 of your income in 2018. The next portion of your income is then taxed at 12%, and so on, up to the top of your taxable income. This progressive tax system ensures that all taxpayers pay the same rates on the same levels of taxable income. As a natural consequence, people with higher incomes pay higher taxes.

The more aware you are of your tax bracket, the more you will be able to accelerate income from year to year without placing yourself in a higher income bracket. The opposite of accelerating income from one year to the next is decelerating income for the purposes of maintaining a particular tax bracket. There are legalities involved with shifting income from year to year, so be aware of these before you proceed. Maintaining a reasonable tax income bracket is not impossible, but it takes knowledge and practice.

Tip #10. Get advice from a tax accountant

If you still have questions on how to file your business taxes and you don’t feel confident to do it yourself, simply use a certified public accountant or CPA. This also is the best choice for those business owners who not only want to file taxes but also require accounting services throughout the year. A professional CPA can help you navigate tax questions about business structure, tax planning moves, etc. and give valuable guidance for managing your business’s financials. Also, it’s the most suitable option for businesses with a more complex structure, or simply for those who want to save time.

 

Take advantage of these 10 tax tips and strategies and make out the best of tax season. Want to truly benefit your business? Turn these tax tips into good habits. By keeping organized records and being proactive in everything related to taxes, you will not only reduce the stress and anxiety related to tax filing: you can gain valuable knowledge of your company and potentially grow your business.

If you’re ready to file your taxes, keep reading How to file taxes for your small business.

 

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