15 small business tax tips for entrepreneurs
If you are planning on opening a business in the U.S., it is of the utmost importance that you understand the tax system. Filing taxes is not the most straightforward thing in the world and there are numerous factors that can influence your tax return. Even if you get in a situation where you can’t pay your taxes in due time, you may be able to qualify for certain tax relief options. Business taxes are a very complicated subject, and the more you know about them, the better. With this in mind, we have prepared a few small business tax tips to help you out. From keeping your tax records accurate to preparing for the tax season, we will cover everything that might help you keep ahead of your taxes and help you create a profitable business.
The importance of managing your business taxes
The fact that taxes are the second-most problem for small businesses in the U.S. means that you need to approach them very carefully. While they might be very complicated at times, dealing with them does not have to be a headache.
Every business needs to pay its taxes in due time and the amount varies by business structure as well as the state where the business is located. Failing to pay them in time, or file them incorrectly may lead to serious consequences, even jail time. That is why it is in your best interest to stay ahead of your tax returns. For this reason, you may want to consider hiring tax relief advocates if you find yourself struggling to keep up with your taxes. But it is always best to prevent your business from ever reaching that point.
The good news is that taxes for small businesses are not as complex as you might think. By simply following our small business tax tips, you will be able to reduce your tax liability, manage your taxes correctly, and stay ahead.
15 small business tax tips
Here’s what you can do to ensure that your business does not get “bogged” down by taxes:
- Keep your records accurate
- Understand the financial jargon
- Keep separate files for business and personal finances
- Utilize accounting software
- Track your inventory
- Understand tax deductibles
- Pay your taxes quarterly
- Donate to charity
- Don’t forget about payroll taxes
- Make contributions to your retirement account
- Learn about section 179
- Apply for the qualified business income deduction
- Utilize bonus depreciation
- Hire an accountant
- Prepare for the tax season as early as you can
#1: Keeping your records accurate
The first thing you need to do is ensure that your business records are as accurate as they can be. By doing so, you will have a much easier time navigating the tax season. Start by pulling bank statements, which will help you reconcile your income with outgoings. Most notably, you will want to account for marketing expenses, such as free samples. Many businesses consider free samples to be an inventory shrinkage instead of a marketing expense.
Another thing you will want to monitor is your credit card points. Throughout the year, your business expenses will create a significant number of these points, which can cover your vacation and similar expenses. You want to make sure that all these rewards and expenses are clearly reported in your financial statements, as they will provide you with extra benefits, help you understand what your business comparability is, and allow you to prepare for the tax return. Furthermore, accurate, clean, records can help you boost your tax refund amount, as it will be easier to identify the key areas. Lastly, make sure that your financial records are as accurate as possible is a great habit to adopt for numerous other reasons as well.
#2: Understanding the financial jargon
When you just start your business, you may be flabbergasted by all the financial jargon. Accounting has its own terminology, after all, and it is in your best interest to make an effort of understanding it. What you want to do is allocate some time to coming to grips with the financial jargon, as that is a critical part of improving your business.
When you look at your balance sheet, you may notice several common phrases such as “Revenue“, “Cost of goods sold (COGS)”, “Gross profit“, and “Net sales“. The distinction between gross income and net income is particularly important, and many small-business owners fail to realize it. Let’s analyze these terms a bit.
- Revenue stands for the amount of money your business earns through product sales or services rendered.
- COGS stands for the cost of producing products that your business sells.
- Gross profit is the money that your business makes after subtracting COGS from the total revenue.
- Net sales are total revenue minus all the expenses.
Let’s say that your business sells a product that costs $200 to create. If you sell that product for $300, your profit is $100. But that is your gross profit. After deducting all the other expenses that your business incurs, you may be left with a net profit of $20. Therefore, it is critical to understand what exactly are your gross and net profits. Doing so will help you expand your business and increase its profitability. As far as small business tax tips go, make sure not to discount this one.
#3: Keeping separate files for business and personal finances
When opening a new business, the first thing you need to do is create a wholly separate bank account for it. One of the easiest ways to get in trouble with the IRS is to record your personal expenses as business expenses.
If you keep your business and personal tax records separate, the IRS will be much less likely to find any issues with either set of records. It will also help you protect your business from common IRS tax scams, as many of them thrive on the confusion caused by mixing personal and business records. Separation of business and personal transactions will also make it a lot easier to file taxes, as you will have clean, accurate records of your business transactions while keeping your personal transactions private.
#4: Using accounting software
Many small businesses choose to utilize simple spreadsheets to manage their taxes. While this is definitely the most cost-effective option, it is also one that is prone to a greater amount of risk. A simple human error can create inaccuracies in your tax returns, inaccuracies that can cost your business greatly. Excel is a great business tool, but it is not going to create financial statements for you. Nor it is going to tell you about your largest vendors or what you bought from them this year.
It is usually in your best interest to look up specialized accounting software, as it can help you save time, reduce errors, and provide you with automated report generation. These features will help you understand your business finances, increase your cash flow, and assist you in calculating deductions. A tax software program will do all of this for you, and more. It can also help you avoid IRS tax relief scams, due to the specialized information that it provides. But the main benefit of accounting software lies in the fact that it helps small businesses understand how their operations are doing, as well as to predict what is coming in the future.
#5: Tracking your inventory
Another key phrase on your business tax returns is “Inventory value”. Inventory value represents the number of dollars that are tied up in your unsold inventory. As time passes, the cost of merchandise your business sells during the year changes, and it is very important to calculate these costs accurately. At the very minimum, you will want to track your inventory once a month.
There are two things that you need to pay careful attention to: Inventory count and inventory value. These two numbers, alongside reasonable financial records, will form the crux of your tax returns, as you will be able to record your total profit/loss much easier.
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#6: Understanding tax deductibles
When it comes to tax deductibles, there is one simple truth. The lower your profitability, the less tax you need to pay. The most common tax deductibles are business expenses. According to the IRS, there are two types of business expenses that are tax-deductible:
- Ordinary business expenses – These expenses are commonly used by similar businesses in the same industry.
- Necessary business expenses – Any expense that assists you in growing your business, or is helpful to it can be considered a necessary business expense.
Now, this does not mean that you can deduct just about everything as a business expense. For example, having lunch with a business partner is, in most situations, not a valid business expense. Here’s a small list of the most common business expenses that the IRS considers to be tax-deductible:
- Commercial leases
- Accounting/legal services
Basically, anything that is a legitimate business expense can be submitted as a business tax deduction. This is one of the most important small business tax tips. If your business is utilizing vehicles for its operations, you may want to look into car tax relief, as well. For best results, you will want to include as many tax deductions as you can in your tax report.
#7: Paying your taxes on a quarterly basis
The IRS requires every small business that predicts more than $1,000 in taxes to make their payments on a quarterly basis. Therefore, you will want to estimate the total tax bill at the end of the year and file your tax returns on the following dates:
- April 15
- June 15
- September 15
- January 15
#8: Donating to charity
If you are looking to reduce your tax liability, you can always donate to charity. However, donating to charity has some limitations namely:
- An individual can donate and write off up to 100% of their taxable income
- Corporations can donate/write off up to 25% of their taxable income
Another thing to note is that donating to charity can be much more than reducing your tax amount. It can help you connect with your market, as consumers are about four times more likely to purchase from a brand that has strong community values.
#9: Set aside some money for payroll taxes
Every business that employs staff has a legal obligation to withhold, report, and pay their payroll taxes. There are three main taxes that you need to account for: Social security taxes, medicare taxes, and federal income taxes. For social security and medicare, employers are required to pay half of the employee earnings, whereas the federal income tax varies depending on the salary and personal expenses.
#10: Small business tax tips – Contributing to your retirement account
Any contributions to retirement accounts are completely tax-deductible. You can utilize this to great effect if you contribute some of the business profits to your, or your employees, 401(k)’s. Aside from making your future more certain, these contributions can help your business with its tax returns.
#11: Section 179
Another way that you can reduce your tax amount is by utilizing IRS section 179. This section allows taxpayers to deduct the cost of certain items as an expense. Basically, if your equipment is used for business purposes more than 50% of the time, is purchased outright, and is actively used in the current fiscal year, you can write it off from your tax return and reduce your tax liability. For some businesses, this can be a deciding factor when it comes to end-of-year profits.
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#12: The qualified business income deduction
To qualify for this particular deduction, your business must have less than $170,050 in taxable income. If you are running the business with a partner, this number doubles. There are many factors that can make you eligible for this deduction, such as your income level, wages that you pay, assets that you own, type of services that you offer, etc.
#13: Bonus depreciation
Instead of using section 179, you can opt to utilize bonus depreciation instead. Bonus depreciation allows you to deduct the purchase price of business-related equipment from business profits over time. Instead of deducting one large sum, you can choose to write off the cost for each year the equipment is in use. An example of this is purchasing a high-grade lighting system for $100,000 and instead of writing off the expense using section 179, you write off $10,000 each year via bonus depreciation.
The main advantage of using bonus depreciation instead of section 179 is that there is no limit to it. Depreciation can create a net loss for your business, offsetting the future taxable income.
#14: Hiring an accountant
As we mentioned previously, tax returns are a very complicated subject. Unless you want to become a professional accountant yourself, you will want to hire a CPA (certified public accountant) for your business. Your CPA will help you manage your records, provide you with personalized tax advice, help you with property tax relief, and much more. A good CPA can be all the difference between a profitable business and one that operates at a loss.
#15: Preparing for the tax season
You never want to file your taxes at the last possible moment. Thus, you will want to prepare accordingly before the tax season arrives. There are two major deadlines to note, March 15 and April 15. The former is where S corporation and partnership taxes need to be filed, and the latter is for personal taxes.
The best time to start thinking about your tax return is somewhere in November. This is the time when you can get a realistic forecast of your company’s tax situation and have plenty of time to plan for it.
There is much more that you can do
These small business tax tips are just the tip of the proverbial tax iceberg. If you want to know more about tax relief, the best tax relief companies, or anything else that concerns taxes, browse the rest of the Consumer Opinion Guide! When it comes to taxes, knowledge is money!