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Owning your own business means having the freedom to work when you want, where you want. For all the advantages of owning a small business, there’s also the monumental stress when it comes to tax season. Small business owners can look for different ways to lower their company’s liability through these small business tax tips.
Remember, it’s always best to always consult with CPA or tax advisor before writing off a business expense or deduction. Read on to discover the top 10 tax tips for small business owners.
Most businesses are classified as pass-through businesses, which includes sole-proprietorships, partnerships, S-corporations, and limited liability companies. These businesses’ profits flow through to the owners or members and are taxed as personal income. On the other hand, C-corporations’ profits are subject to corporate income tax. Depending on the type of business you own, re-classifying as a C-corporation could allow for higher deductions.
Most pass-through businesses can deduct 20% of their business income when calculating their federal income tax. However, certain types of service-based firms like legal, medical, or accounting practices may not get a deduction if their income is over a certain threshold. Therefore, make sure you have the right classification.
One of the best small business tax tips is to hire a trustworthy, skilled accountant to help you with your taxes. Since many tax-saving tips and deductions are only applicable to certain business entities, you might make a mistake when claiming items.
Hiring an accountant can mean the difference between a hassle-free tax return and the dreaded audit. To find the right one, you can ask colleagues, friends, and family for personal references. Alternatively, you could find a CPA in your area that has excellent reviews. Before deciding on an accountant, have an introductory phone call to see if they’re the right fit.
Keeping all of your business records and receipts will save you headaches when it comes time to calculate business expenses. 1Tap Receipts is an app that helps you to compile and store receipts from business expenses automatically.
Another tax saving tip for small business owners is to open a business account and make all business-related purchases from that account. At the end of the year, you’ll be able to see all your business expenses in one place.
Usually, business owners will write off equipment little by little each year, as it depreciates. However, Section 179 lets you claim the full expense the year the equipment was purchased. Business owners can claim a wide range of property: office furniture, computer hardware, pizza ovens—the list goes on. However, certain items don’t count, such as land, so be sure to look at the eligible items.
Business owners can deduct up to $1,000,000 of eligible property under Section 179 for 2020. Once they figure out which expenses are eligible, business owners need to file the separate Form 4562 to elect the 179 deductions.
Hiring family members can lower a business’s tax bill for two main reasons. Firstly, they can claim the salary or wage as a business expense. Secondly, they can avoid paying Federal Income Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes.
For example, a company owned by two spouses that hires a child under 18 years old doesn’t have to pay FICA taxes. For employees under 21 years old, employers don’t have to pay FUTA taxes. For family members under 18 years old, employers don’t have to pay FUTA, FICA, Medicare, and SUTA taxes. Keep in mind that the business needs to be either a sole proprietorship or a partnership with your spouse for this to work.
Business owners can use a variety of employer-sponsored retirement savings plans: SIMPLE IRA, SEP IRA, 401(k), and profit-sharing. Contributions for yourself and employees can be tax-deductible—up to $5,500 for small business owners under 50 and $6,500 for those over 50.
Luckily, business owners have until the due date of 2020 taxes in 2021 to contribute to a retirement plan. However, some plans may need to be established before the end of the 2020 tax year. It’s best to talk to a tax advisor or an accountant to see what contribution amount makes the most sense.
If you have a car that you use to get to and from work, you can add a business vehicle deduction to your expenses. Similar to the home office deduction, you need to figure out the percentage of the time you use your car for work. Then, apply that percentage to the vehicle’s costs, such as gas, insurance, and repairs. Alternatively, you can use the IRS’s standard mileage rate, which is $0.57½ per mile for 2020.
If you run a small business from home, home office deductions should be on your business expenses. The first way to calculate the home office deduction is the simplified method, which is $5 per square foot, up to 300 square feet. All you have to do is find out the size of the space that you use for work.
The regular method requires business owners to add up all of the actual expenses of their home office. These expenses can include mortgage interest, utilities, repairs, depreciation, and home insurance. The calculation for these expenses is based on the percentage of your home you use for the home office. For this deduction to work, the home office needs to be used regularly and exclusively for the business. It also has to be the principal place of business.
A charitable stock donation is when business owners donate an appreciated asset, such as stocks, mutual funds, or bonds. It’s one of the best tax-smart ways to give to charity, yet not many business owners take advantage of it. When you give a charitable stock donation, you avoid capital gains tax, allowing 20 percent more of the stock value to be donated. Also, you can still deduct the full fair market value of the stock from your income taxes.
You can easily give a charitable stock donation through a website like the Giving Account at Fidelity Charitable. Using a donor-advised fund takes the hassle and paperwork out of donating, and allows you to choose your favorite charity to receive the funds.
When business owners use bonus depreciation, they can deduct 100% of the cost of machinery, equipment, computer software, appliances, and other business property. Thanks to the Tax Cuts and Jobs Act (TCJA) of 2017, businesses can write off 100% of eligible assets purchased after September 27, 2017, and before January 1, 2023.
Many business owners confuse bonus depreciation with Section 179 since both allow the immediate write-off of equipment. However, for write-offs in Section 179, the equipment has to have a taxable profit. On the other hand, bonus depreciation isn’t tied to the business’s taxable income.
For many small business owners, the thought of the nearing tax season can induce anxiety, panic, and worry. But have no fear—by carefully going through each of the small business tax tips on this list, you’ll be better prepared to file your tax return.
Taking the steps to from the start to collect all of your business’s cash-flow information gets you one step closer to saving on tax filing. Bank with Greenwood to help you build wealth and get your money right while giving back and supporting Black and Latinx communities.
Absolutely! The best way for small business owners to get a tax break is to track all of their business expenses carefully. Technology like Mint makes it easy to follow and categorize each payment, then label it as business-related. Business owners can also seek professional advice from a tax advisor or accountant to get the best small business tax filing tips.
No matter how much a small business earns, they are legally required to submit an annual tax return. Business owners who make less than $400 don’t have to pay self-employment tax, but that’s the only tax they can avoid. Even if you’re operating at a loss, you should file your taxes so you can take advantage of deductions later on and avoid liability.