Before you let the hustle and bustle of the holiday season take over your business (and your life), now’s a good time to review your financial situation and explore some money-saving small business tax tips. Below is a list of my top tax tips entrepreneurs can still benefit from at year-end.
1. Deduct Startup Expenses
Did you start your business this year? You may be able to claim some of your startup expenses on your tax return in the year you actually opened the business.
To qualify as a startup expense (a capital cost), the IRS requires the expense to meet two requirements:
- The expense was paid or incurred before the day your active trade or business began.
- The expense would be deductible for your business if you were already operating the business. Note: the actual business you open has to be in the same field as the business you had in mind when you made the purchase.
Other deductible costs associated with opening a business may include:
- Advertisement and marketing for the opening of the business
- Salaries and wages for employees who are being trained and their instructors
- Travel and other necessary costs for securing distributors, suppliers, or customers
2. Automate Accounting
Eliminate tax headaches by automating as much of your accounting as you can. Use a cloud-based accounting software application that syncs with your bank account and automatically categorizes and reconciles your credit card and bank transactions.
Then use an app to track expenses by taking pictures of receipts on your smartphone and uploading them to the cloud. Overstating or understating expenses is the best way to wave a red flag at the IRS, so know what you can and can’t deduct for travel and entertainment, and make sure you keep accurate records.
3. Defer Income and Purchase New Equipment
Are there some purchases you could make before the year ends? Increasing expenses, such as purchasing new equipment, is a great way to lower your tax bill. Buy that new copier or computer now! Check with your accountant as to whether you should take the whole write-off now or depreciate it over time.
If you expect your business to be in the same tax bracket or lower next year, defer revenues until next year by waiting until the end of December to invoice your customers. That way, you won’t pay taxes on that income until you file your returns the following year.
If you expect your business will be in a higher tax bracket next year than it is this year, accelerate revenues so they’ll be taxed at this year’s lower rate, and postpone deductible expenses until next year so you can enjoy the deduction when your tax rate is higher.
4. Contribute to a Retirement Plan
Making a pre-tax contribution to your retirement plan up to the maximum amount allowable will reduce your taxable income for this year. You have until December 31 to make your 401(k) contributions and until April of next year to make IRA contributions.
If you’re self-employed and haven’t set up a plan yet, you have until December 31 to set up and fund a one-participant 401(k) plan, also known as a solo 401(k).
5. Remember Your Rent Income
Do you own the building your business is located in? If you own the building, you might need to pay yourself the market rate rent and then pay taxes on the income. Check with your tax accountant to see if registering an LLC or corporation makes a difference to your tax requirements.
6. Give Back to the Community
One small business tax tip is to increase your deductions by making a contribution to charity before the end of the year. Choosing a local charity, cause, or school can boost your profile in the local community in addition to providing a tax break. Keep records of the tax ID for each nonprofit you donate to, so you don’t have to hunt for them at tax time.
7. File W-2s and 1099s
Do you have employees? January 31 of each year is your deadline to mail employees their W-2 forms and independent contractors their 1099s. (Since that date falls on a Sunday this year, the deadline will be the next business day.) New forms must be ordered each year; be prepared by ordering them early from your payroll service.
W-2 forms are also filed with the Social Security Administration (SSA) and show all the wages and taxes your company paid during the tax year. You total your W-2s and file the totals with a W-3 form. Verify all your employees’ names and Social Security numbers before you prepare the W-2s. You can verify up to 10 names and numbers on the Social Security Business Services Online website.
8. Plan for Estimated Taxes
Most small business owners know whether or not they’ll end up owing taxes. You can either set aside a certain amount of money every month to make sure you have enough to pay your bill at tax time, or you can start paying estimated taxes.
The general rule is:
- If you are filing as a sole proprietor, partnership, S corporation shareholder, or self-employed individual, and you expect to owe more than $1,000 in taxes, you should pay estimated taxes.
- If you are filing as a corporation and you expect to owe more than $500 in taxes, then, you should pay estimated taxes.
- If you had a tax liability last year, you may have to pay estimated taxes this year.
9. Remember Often Overlooked Deduction
Remember, you can deduct your tax preparation fees from your business taxes. Ask your tax preparer to invoice you this calendar year and pay all or half upfront. The same goes for any fees paid to a financial planner for your business.
10. Schedule a Tax Planning Session With Your Accountant
When it comes to taxes, your accountant can be your best friend. And, the cost of a special tax consultation will be paid back tenfold in tax savings.
Schedule an income tax planning session with your accountant, and before you meet, send your accountant copies of your current profit and loss statement, an expense report, an accounts receivables report, planned income for the rest of the year, and any other changes for the calendar year that should be discussed. This will allow your account to review this year, compare it to last year, and create an estimated tax amount that you can plan for or work to reduce in the remaining days of the year.