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Corporate Tax Tips for Small Businesses

Finance

Corporate tax day is fast approaching, so NerdWallet asked expert tax advisors for their ideas. What should small business owners know about filing corporate taxes? How can they save money and avoid penalties? How has the Affordable Care Act changed the tax filing process?

Our experts include:

Read on for their corporate tax advice!

General advice

Tax deadlines

  • “Employers who are strapped for cash shouldn’t refrain from paying their payroll taxes or their state corporate taxes because these are valuable deductions to them in the year that they are made. They should borrow the money that they need to pay off taxes that are due so that they can utilize the deduction as the benefit of the deduction is more valuable than the interest expense. Even if you don’t owe any taxes, the IRS will charge you a monthly penalty of $195 per month per shareholder if you file your taxes late. So if you fail to file a tax return after four months, and you have two partners, even if you don’t owe any tax, you will owe $1,560 in penalties. The IRS may waive the penalty once, but why waste the one time waiver on something that you can prevent?”
    - Yosef Y. Manela
  • “A corporation or S corporation can get a six-month automatic extension of time to file its income tax return. Most corporations apply for the extension because 2 1/2 months isn’t enough time to get the information required to prepare their income tax returns. Some expenses paid after the year-end may be currently deductible. The time for paying the tax isn’t extended.”
    - Michael Gray

Retirement Plans

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  • “Even though the year is over, employers can still contribute to their employees’ SEP IRA or other retirement plan and get a deduction for last year. While some retirement plans, like a 401k plan, require funding immediately, other plans can be funded until the due date of filing one’s returns, including extensions.” – Yosef Y. Manela

Little-known tax-saving ideas

Mileage deductions

  • “Take the mileage deduction instead of gas bill receipts! The IRS gives two options for gas bills — getting 55.5 cents per mile or taxes off the gas receipts. Ultimately it is a better deal to get the mileage.” – Steven Aldrich

Section 179 Rules

  • “The Relief Act authorized a much higher Section 179 deduction limit for tax years beginning in 2012. Now, businesses can immediately expense the cost of qualifying property up to $500,000. Without this change, the maximum deduction would have only been $139,000. So businesses now have another $361,000 deduction available to them.” – Jim Keller

Reimbursed Business Expenses

  • “For small business owners, particularly if they operate flow through entities such as S corporations or Limited Liability Companies, they should review what expenses they may have incurred on their personal account on behalf of their business, such as travel, meals and entertainment, supplies, personal vehicle mileage, and even the business use of their home. Then, they should recharacterize their distributions from their business as reimbursements for those expenses. By doing so, those expenses become deductible to the business and not taxed to them personally. This will also reduce their income tax liability.” – Yosef Y. Manela

Business tax credits extended

  • “The Relief Act extended the availability of several business tax credits that had expired. Most notably, it extended the deadline for employing individuals whose wages are eligible for the Work Opportunity Tax Credit. Congress tinkered with the rules-now, all eligible employees (i.e., employees who belong in one of the “targeted groups”) must be hired by Dec. 31, 2014. Before, there was one deadline for “qualified veterans” and another deadline for the other targeted groups. In addition, the Research Credit was retroactively extended, with modifications, and the Employer-provided Child Care Credit was permanently extended.” – Jim Keller

Office equipment vs. supplies

  • “Equipment can be “expensed” directly via a 179 deduction, but it is important to classify the difference between just regular supplies (paper, pens) and equipment (computers, furniture, etc.). Depreciation is standard for equipment, where the expense is taken over the life of the equipment (generally 5 years for computers, printers and other electronics). You can choose to expense it all in year 1, but if you have a growing business, it is better expense over 5 years, as each year you will be put in a higher income bracket, so it’s important to have expenses to offset this.” – Vincenzo Villamena

S Corporation elections

  • “For tax years beginning after 2012, the Relief Act increased the top rate for qualified dividends from 15% to 20%. Adding the new 3.8% surtax on investment-type income and gains pushes the top post-2012 rate for higher-income S corporation shareholders to 23.8%. Fortunately, several elections can be made on Form 1120S that would enable S corporations to distribute some or all of their Accumulated Earnings and Profits, which cause dividend taxation, so the dividend would be taxed at 2012′s low 15% maximum tax rate. The elections are made on Form 1120S for the year of the distribution(s), which means they can represent a great post-2012 planning opportunity in the right circumstances.” – Jim Keller

Hiring family members as employees

  • “Save on your profits by paying them as wages to your children for helping out with your business. Under approximately $6,000 these will be tax free. A great way to save and teach your children life lessons. By hiring your spouse you can reduce medical costs for your family. As their employer you can pay for their insurance, etc tax free.” – Steven Aldrich

Don’t forget about…

Classification of employees vs. independent contractors

  • “This is something that the IRS takes seriously and can be caught if you end a business relationship with a contractor in a bad way. They can whistle-blow to the IRS purposefully or in applying for unemployment unintentionally report you. IRS takes this seriously, so every tax year, this should be assessed as roles and responsibilities change.” – Vincenzo Villamena

Documentation of Expenses

  • “It is important to have documentation for expenses via credit card statements and bank cards. You don’t need to carry receipts. In fact, the IRS doesn’t require documentation for meals/entertainment under $50. It is highly suggested that any major expenditures (over $500) should have a receipt to show the cause for business. Logs can also be kept with the 3 P’s and 1 D – Person, Place, Purpose and Date. This is sufficient evidence to show the IRS in case of an audit.” – Vincenzo Villamena

Accrued wage and bonuses

  • “Accrued wages and bonuses should be paid by March 15, 2013 for 2012 calendar year corporate income tax returns or risk being subject to penalties on the employees as deferred compensation under Internal Revenue Code Section 409A.” – Michael Gray

The Affordable Care Act

  • “The best resource for dealing with complying with Health Care Reform is your insurance agent for business medical insurance. Very small employers such as professional practices may find a self-insured medical reimbursement plan beneficial. The corporation pays the employees’ medical expenses and claims a tax deduction and the employees exclude the income. Such plans must be non-discriminatory or taxable income can result for highly compensated individuals.” – Michael Gray
  • “Many small businesses until now could not afford to offer healthcare insurance to their employees. Most employees know that when they work for a small employer that that would be a benefit that they would be compelled to forego. However, this Act requires that every employer reconsider the value as well as the cost of providing healthcare coverage because of how valuable the tax credit will be to them. Unlike a tax deduction, a tax credit could be very valuable. The tax credit for providing a small business’s employees with health insurance can be 35% to 50% in the future years. So far, though, the computation of the credit has been very tricky. Most employers don’t know how to apply it and many haven’t qualified. The IRS was actually stunned when they realized how few employers who provide medical insurance to their employees were utilizing this credit. And then they were surprised that those that did take the credit still couldn’t calculate it correctly. It would be very advisable for any employer to meet with their tax professional and become very familiar with how health insurance costs should be factored into their cost of labor, salaries, and overall wages.” – Yosef Y. Manela
  • “When it comes to the Affordable Care Act, many small business owners remain focused on 2014, but they should not lose sight of some very specific requirements that will be rolled out this year—for example the implementation of a $2,500 cap on employee contributions to health flexible spending accounts plans. Businesses should also ensure that they are harnessing the full potential of the various tax credits currently available, including those available to small businesses that offer health insurance coverage to their employees.” – Bill Norwalk

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