In a climate of economic uncertainty, weak demand is forcing many businesses to cut costs. In a recent survey of small business owners, only one-third were optimistic that the market will pick up by the end of the year. Of the 2,000 businesses surveyed, 67% do not expect to hire more people in 2013, and about half plan to maintain their current size rather seek market expansion in the coming year.
With such an outlook, scaling back the costs of business has become more critical than ever for SMEs struggling to turn a profit. One of the quickest ways to cut operational costs and increase revenue is by cutting your tax burden. There are many forms of deductible expenses that can apply in your situation, if you took the time to explore them.
If you’re one of the many businesses today that problems with cash flow, then it’s time you stem the outflow to conserve what little capital you have left. We’ve compiled a list of tax breaks and incentives to help you survive in today’s difficult environment.
1. Make use of tax breaks
According to the US Small Business Administration, business owners should familiarize themselves with business expenses and capital expenses. The former is comprised of operational costs and are tax-deductible, while the latter is used for acquiring assets and is NOT immediately deductible. However, you can still recover capital costs through other means, like depreciation. The loss of asset value is covered in Publication 496 of the IRS, “How to Depreciate Property”.
Another popular option is the home office deduction. The SBA estimates that more than half of small businesses in the US are home-based. However, be aware that this tax break comes with strict requirements. For instance, part of your home must be set aside for the regular and exclusive use of your business, and deductions are based on the percentage of the house reserved for business use. And before you cheat, be aware that availing of the home office deduction automatically increases your chances of getting an audit.
In recent years, a number of tax breaks have cropped up that you might not be taking advantage of. The 2010 Affordable Care Act provides tax credits to small businesses that cover at least half of employees’ health insurance premiums. The Small Business Jobs Act also allows new businesses to recover up to $10,000 of their startup costs, up from $5,000 prior to the new legislation.
2. Hire smartly
You can also decrease the impact of business taxes through smart recruiting.
The small business tax code generally favors family-run operations. If you hire a family member, such as your child for a full-time position, he or she isn’t required to pay federal unemployment tax, income tax or Social Security. If you have an opening for a temporary or seasonal position, consider hiring an independent contractor. Contractual jobs can be paid by the hour and are thus exempted from payroll withholding taxes.
Finally, prioritize veterans or at risk-youth in your hiring queue. The Recovery Act offers tax credits to businesses that provide employment opportunities to specific classes of people.
3. Know which tax deductions are weaker
At the height of the recession in 2008, former President Bush signed the Economic Stimulus Act. It was meant to help struggling businesses stay afloat by letting them write off a larger portion of asset expenses, such as vehicles and equipment. The 50% bonus depreciation was temporarily increased to 100% by President Obama, however it has since returned to the previous level until the end of the year.
The best time for business expansion was 2011. During that year, businesses were allowed to write off expenses up to $500,000 from the $250,000 expense limit set by the previous administration. This year, businesses can only write off up to $139,000. In addition, last year angel investors enjoyed the full 100% of their capital gains, the highest tax break ever in recent years. This year, it’s back to 50%.
4. Know which tax breaks no longer apply
One of the biggest headaches of tax management is keeping track of them. Unless you hire a CPA or tax professional, it’s easy to get lost in the maze of IRS regulations, and you might still be following the outmoded advice of your accountant from 5 years ago.
Here are some tax breaks that are no longer applicable:
Deductions for health care – Back in 2010, the Small Business Jobs Act allowed entrepreneurs to deduct the full cost of their health insurance costs from self-employment taxes, along with their family members. This has since expired.
Social Security tax exemption – After the War on Terror, Congress passed the HIRE Act to help returning veterans find work opportunities. Businesses that hired people who fell under the provision were exempted from paying payroll taxes. Today employers are back to paying the 6.2% Social Security tax.
Lower tax estimates – Small businesses have to make estimated payments that equal last year’s taxes, or risk falling short of the actual taxable amount and incur penalties. The Recovery Act lowered the estimated taxes to 90%, but the amount is back to full. Even though this seems like a miniscule change, that extra 10% could make a considerable difference for small companies with limited capital for pursuing growth.