The end of the holiday season signals when you should start thinking about filing taxes. For small business owners, this means getting together the proper revenue and expense documentation and taking the appropriate reporting measures to keep your business compliant, while making sure you maximize the credits you are owed. Here are five small business tax tips to help guide your company toward happier returns in 2015.
1. Document, document, document.
“Keeping good records is the foundation for everything else–you can’t deduct what you haven’t documented,” says Mike Slack, tax researcher at The Tax Institute at H&R Block. One simple way to do this is to dedicate all expenses to a bank account used only for business expenditures. “Having separate, business-only bank accounts will make it easier to keep good records and file accurate tax returns.”
Avoid an audit: Data entry errors are among the most common red flags for auditors, so check everything two or three times for accuracy. You may want to wait until you have all of your documents together to begin the data entry process, as this helps with accuracy.
Take advantage: There is a variety of business and finance software available to help businesses file taxes in a timely and accurate manner. Look for tax preparation software that offers a free accuracy review; most do.
2. Backup and secure your digital records.
Even if your company stores accounting data in the cloud, it is always wise to keep on-premise backup of your most critical data–your business expenses, sales numbers, inventory, employee records, et cetera. In the event of a data disaster, keeping your most recent backup safely stored in a desktop NAS device is an inexpensive form of data insurance.
Avoid an audit: Certain businesses have a legal obligation to keep every piece of data from business transactions. As the price of storage grows more and more affordable, many business find it easier to just store everything.
Take advantage: Most SMBs need not hold on to every piece of data they generate or receive. Pay attention to what types of data you need when filing taxes. If it holds no value, do not be afraid to part ways.
3. Understand applicable tax requirements.
To paraphrase the simplest rule in the tax code, if you earn $400 doing anything, you must report that income to the IRS. If you are self-employed in any capacity, this means new tax requirements and tax forms. “Most self-employed individuals and sole proprietors report their income and expenses on Schedule C or Schedule C-EZ, and are required to compute self-employment tax on Schedule SE if they earn at least $400 from the business,” advises Slack.
“Also, if you have employees, you must pay employment taxes, including unemployment tax and Social Security and Medicare taxes. In addition, you must withhold and remit federal income tax and the employee portion of Social Security and Medicare taxes.”
Avoid an audit: Make sure to classify any and all employees on the payroll appropriately, rather than independent contractors, which are a red flag for the IRS.
Take advantage: Small businesses offering health insurance to employees may be eligible for a tax credit up to 35 percent of their expenditure under the Affordable Care Act (ACA). Refer to the IRS code, or ask a tax professional about eligibility.
4. About those tax forms, make sure your tax software supports them.
Tax software comes in tiered packages. Generally speaking, the premium packages come with more support features–we will use H&R Block as an example, but other tax software is similarly structured.
Basic edition will suffice for most small business or self-employment tax filing scenarios. The best part is you have access to tax professionals via real-time chat or over the phone, free of charge. The software is inexpensive, under $15.
Deluxe edition gives you added tools to speed up the process. If you’re a contractor, you can import 1099 forms right into your return, which is a very handy time saver for a SMBs. Prices range between $35 and $45, depending on whether you want state filing support bundled in.
More information can be found on the business and finance software software product pages.
5. Deduct your eligible expenses—carefully.
Tax software will guide you through applicable expenses for which you may deduct from a tax return. “A deductible business expense must be both ordinary and necessary,” explains Slack. “That means it must be common and accepted as well as helpful and appropriate for your trade or business.”
If you have a home office, you may be eligible to write off part of your rent or mortgage, and utility expenses that pertain to the operation of your business.
Avoid an audit: The IRS is specific about what constitutes a home office, and this may trigger an audit should you be too zealous with the amount that you write off. Take advantage of the free tax professional that comes with your tax software purchase for specific questions about what and how much to write off.
Take advantage: You may deduct certain car expenses if you use your car for business purposes, using either the actual expense method, or the standard mileage rate of 56 cents. Keeping a running Excel file throughout the year logging trip mileage and dates is a simple and effective way to track business travel.
We would love to hear about your small business tax tips for 2015 in the comments below.