7 Tax Tips for Your Small Business
Your active and informed role as a small business owner year-round is crucial to your success when it comes to taxes – from managing records to understanding deductions, credits and deadlines.
To better negotiate that path, take a look at these tax tips for small businesses:
Learn about the most common tax deductions and credits for small businesses.
Be sure you’re taking advantage of the most common deductions and credits for small businesses – you could have hundreds of dollars in expenses that qualify. (Deductions lower your taxable income and credits are subtracted from your tax bill directly.)
Some credits and deductions will come down to how your business is structured and others depend on type of business, size and income.
“Depending on how your business is legally structured, you’re allowed to deduct ‘ordinary and necessary’ expenses that your business incurs by just operating,” writes Georgia McIntyre in Fundera’s Small Business Taxes: A Complete Guide.
The most common deductions – the ones that apply to almost all small businesses – include vehicle expenses (if you use the vehicle for business purposes); insurance premiums, such as health insurance and malpractice insurance; and rent payments, payments you make on the rented business space and on equipment and machinery.
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. It doesn’t matter if you own or rent as it applies to all types of homes.
Deduct your startup costs.
If you’ve just started your business, your small business can deduct a lot of the expenses you incurred to get it set up and going. According to the IRS, you can deduct up to $5,000 of business startup costs and up to $5,000 of organizational costs (as long as your costs don’t exceed $50,000).
Other common deductions for small businesses are for inventory items such as materials and supplies, and business loan interest.
“No one likes paying interest on what they borrow, but those payments are a little easier to swallow if you know you can deduct them on your taxes,” writes McIntyre for Fundara, a marketplace for small business financial solutions such as loans, credit cards, and banking.
Find a tax accountant who can help.
If you don’t have one already, find a business accountant to help. Look for someone who’s a good match for your business, with experience on your structure and working with others in your industry. They could also end up helping your business with other financial matters as well.
Look for recommendations through your business network, i.e., your banker, attorney, etc., or get referrals from local business groups, such as the local Chamber of Commerce. If you want a CPA or Certified Public Accountant, check with the American Institute of American Public Accountants or AICPA.
“Hiring a person or a team of people to work with you on accounting, keeping diligent financial records, filing taxes, applying for small business loans, and planning for the long term is one of the best decisions you can make as a small business owner. One of those people is a certified public accountant,” writes Gretchen Schmid in a Fundera blog about CPAs.
Keep accurate records
The business you’re in will affect the type of records you need to keep for federal tax purposes, the IRS says, but generally, the law doesn’t require you keep any special kind of records for your small business.
“Good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns,” the IRS says.
Understand what’s deductible as business expenses.
The IRS defines a deductible business expense that’s “both ordinary and necessary.” It’s “ordinary” if it’s an expense that’s “common and accepted in your trade or business.” And a necessary expense is one that’s “helpful and appropriate” for your trade or business. But it doesn’t have to be “indispensable” to be considered necessary.
Expenses such as cost of goods sold, capital expenses and personal expenses are not considered business expenses.
Divide personal from business expenses.
If you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
The IRS gives this example: if you borrow money and use 70 percent of it for business and the other 30 percent for a family vacation, you can deduct 70 percent of the interest as a business expense. The remaining 30 percent is personal interest and is not deductible.
Look into accounting software.
Consider getting accounting software designed with small businesses in mind, such as the popular Intuit QuickBooks, as well as FreshBooks, Wave, Xero (for Macs) and ZoHo (for “really small” businesses).
Many of the apps go beyond tax accounting, offering help with automatic payment reminders, invoicing, payroll, inventory management, profit and loss analysis, etc.
“All the best online accounting programs for small businesses have bookkeeping features that allow you to record debit and credit transactions as well as accounting features that let you run reports and analyze your business's financial performance,” writes Lori Fairbanks in a post for Business News Daily.