Now that our New Year’s resolutions have come and gone, it is time to get down to business; tax business that is. For most small and growing businesses, it can be a stressful time of year. But as with most things, the more you know, the easier things are. That is why we came up with five tax tips to help you better navigate the murky waters of tax season.
1. Maximize Writing off Deductions. The rules that govern write-offs might seem simple. There are the obvious deductions: expenditures in such areas as business travel, office equipment, salaries, and rent. There are also potential deductions that are not as obvious which are sometimes overlooked. For example, some losses a business incurs might be deducted against the business owner’s personal income to reduce taxes. If the business owner’s losses exceed personal income for the year, you can use some of the losses for that year to reduce taxable income in future years. Another not so well known deduction is to combine business and pleasure. If more than half of a personal trip is devoted to business, you should deduct the travel costs and other business-related expenses.
2. Pay Quarterly Estimated Taxes. Paying quarterly estimated taxes can be a troubling time for many small businesses. Cash flow problems and IRS penalties can occur if you fail to keep up with estimated taxes. But how do you know if your business should pay estimated taxes? If your total tax bill in a given year will exceed $500, you should probably pay quarterly estimated taxes. By the end of the year, you must pay either 90% of the tax you owe or 100% of last year’s tax (the figure is 110% if a business’s income exceeds $150,000). You can calculate quarterly estimated taxes by subtracting your expenses from your income each quarter and applying your income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).
3. Keep Up with Your Sales Tax. While most services continue to remain exempt from sales tax, most products are taxable. When you sell a product or service that is taxable, you must register it with your state’s tax authority. You must track taxable and nontaxable sales and include them on the company’s sales tax return. Another important sales tax tip to remember is that if you do not have a physical presence in another state, but sell items via the internet or by catalog in that state, you might be subject to a state’s “use tax,” but typically not to that state’s sales tax. Just be aware of your sales tax responsibilities in all states in which you do business.
4. Use Charitable Contributions Wisely. To get the maximum tax benefits, remember these basic rules: Only contributions to charities listed as qualified organizations by the IRS are deductible. Contributions of more than $250 require a letter of receipt from the qualified organization. For contributions of less than $250, a canceled check is sufficient. Keep in mind that you cannot deduct contributions already written off as a depreciated asset, the value of time or services you volunteer, or the part of a contribution that benefits you.
5. Don’t Confuse Loans and Income. Most business loans are not considered income. An exception to this rule is when you negotiate with a creditor or lender to reduce your debt. You still owe taxes on any forgiven amount of this debt. One good thing about business loans, however, is their ability to offer substantial tax benefits. The principal and interest you pay on your loan are business expenses and you can deduct them from your taxes as such. To take advantage of a tax deduction, you must report the total amount of the loan, and the assets and expenditures financed must be necessary for you to operate your business.
Accurately recording your taxes is of the utmost importance, but it’s just as important to your business to take advantage of all possible deductions. Please consult with your tax accountant or consultant to determine if these tips can be useful for your business. If you continue to have questions about any of these topics, the IRS small business website provides further resources.