The Congressional Budget Office (CBO) estimates that the federal tax revenue for 2013 totaled $2.77 trillion, that number is estimated to increase to $3 trillion for 2014. These numbers are the highest that it has ever been, so it’s no surprise that in a recent survey (2013) conducted by the Internal Revenue Service (IRS) Oversight Board, there was a slight increase of total respondents (12%) believing it’s acceptable to fudge on their taxes.
There are some severe repercussions if an individual is caught cheating on their taxes (e.g. fines or jail time). Also, in a recent survey (2013) conducted on tax professionals, 44% of respondents said their chance of being audited increased 25-50% over the last two years. So instead of rolling the dice and taking a chance, you need to Choose the Right Accountant and follow these business tax tips. They’ll help you understand your business financials better, avoid audits and fees, and reduce the amount of taxes you legally need to pay.
1. Understanding Your Available Small Business Deductions
The more tax deductions you can legally claim will ultimately lower your business’s taxable profit. For any deductions, it is important that you save your expense receipts, just in case if there’s an audit. The rule of thumb is to save your tax records for three years and six years if you omitted more than 25% of your reported gross income. If you claim any depreciation, amortization, or depletion deductions, you should keep all related records as long as you own it. In addition, since tax laws continually change year after year, you should consult with your accountant on tax credits and deductions.
Top Small Business Deductions
- Starting a Business – Deduct up to $10,000 the first year you’re in business
- Advertising and Marketing Expenses – (Internet, Print, Promotional Activities, Radio, Sponsorship, & TV)
- Auto Expenses – Deduct 56.6 cents per mile
- Bad Debts – Deduct unpaid cost of goods but not for unpaid services
- Charitable Contributions – Only to qualified organizations
- Professional Services and Fees – Deduct only for the year incurred
- Entertainment Expenses – Deduct 50% of the cost
- Equipment Expenses – Deduct up to $500,000
- Software – May be deducted from purchase year unless software comes with computer
- Travel Expenses – (Airfare, Auto, Communication, Lodging, & Meals)
2. Understanding The Remaining Small Business Jobs Act Tax Provisions
When Obama signed The Small Business Jobs Act of 2010 into law, the original bill included over 17 tax provisions to decrease tax burdens for small businesses. Unfortunately, many of the tax breaks have expired but small businesses can still take advantage of the remaining provisions that haven’t.
- Health Care Tax Credit – See section below
- Deduct Startup Costs – Deduct up to $10,000 the first year you’re in business
- Small Business Expenses – Deduct up to $500,000
- Cell Phone Expenses – Eligible for deductions
- Limited Penalties on Tax Errors – Capped at 75% of mistake
3. Maximize The Affordable Care Act Tax Credits
Small business owners that offer health coverage to their employees may be eligible for a tax credit to offset the cost of health premiums. Small businesses whom qualify must have 25 or fewer employees with an average salary of $50,000 or less. For 2013, these tax credits will allow small businesses to cover up to 35 percent of the health care premiums. In 2014, the tax credit will cover up to 50 percent of the premium cost. You should utilize the Small Business Health Options Program (SHOP) marketplace to find affordable healthcare coverage for your workers.
4. Remember to Pay Your Quarterly Taxes
Many small business owners are unaware that they need to pay quarterly taxes past their first year in business. At the end of the second year in business, owners must have paid at least 90 percent of the taxes that are owed. There are some exceptions, such as your business being exempt from paying quarterly taxes if the annual total tax bill does not exceed $500.
The best way to manage your quarterly taxes is to monitor your Profit & Loss Report. Set aside a percentage of your business revenue to pay your quarterly bill accordingly. Understanding your business finances will help you avoid any cashflow problems.
5. Paying Attention to Red Flags that Triggers Audits
Being audited could be a matter of chance but there are certain factors that raise the IRS concerns. The IRS pays more attention to some returns than others, so it’s important to understand the factors that may elevate the likelihood that auditors take a closer look into your financial records.
- Business Losses – Three or more years of business losses within 5 years
- Charitable Deductions –Cash contribution exceeding $250, Noncash contribution exceeding $5,000
- Classifying Employees as Independent Contractors – Misclassification can be seen as an attempt to avoid payroll taxes; non-compliance can bring penalties and back taxes.
- Home Office Deduction – Deduction is very specific
- Large Sum Miscellaneous Deductions – Exceeding average range deductions
Finally, many startup or small business owners make the mistake of mixing their personal and business finances together. It is crucially important that you keep your business and personal expenses separate otherwise it can create major confusion when you’re filing taxes. Any business that is incorporated must maintain separate bank and credit card accounts for both your personal and business use. In addition, any use of business expenses (i.e. homes, autos, and etc.) for personal use is highly scrutinized by the IRS. To help avoid any future headaches, it is best to be meticulous in keeping good records and have a powerful accounting software that can help manage your small business finances.
I hope that these tax tips for small businesses will help you during this tax season. It may be a bit much for you to absorb all at once, so you might seek the expertise of an accountant. However, once you’re able to collaborate with your accountant, you’ll be able to understand your business financials, minimize your risk of being audited, and reduce the amount of taxes yours business needs to pay. Are there any tax tips that you would like to share?
This article originally appeared on Servora Blog and has been republished with permission.