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It’s tax time. Each entrepreneur and small business owner strives to get to the point where your company is making money. Phrases like “positive cash flow” or “break even” are music to the entrepreneur. When we get to that point, what goes hand in hand with making money is paying taxes on that income. But as an old Northwestern law school professor used to say, “Taxable income is better than no income.” Every entrepreneur should be so lucky.
Like other aspects of being an entrepreneur, we have to understand how to take care of our taxes and our tax filings. But with so much to focus on, words like “alternative minimum tax” and “net operating losses” sound like Greek to many of us. One of the things we talk about as an entrepreneur is “Knowing Where You Need Help” as a skill you must develop and this is definitely one. There are many accountants, CFOs and tax prep services that have “been there, done that”. Want to feel even more overwhelmed than you are, try doing it yourself. There are many resources that can help you.
So as we approach National Tax Day, here are a few tips that not only help with your taxes but put in place tools that help you manage your finances. We divide them into three sections:
Preparing for The Future
Managing the Filing Process
Using Tax Breaks
PREPARING FOR THE FUTURE
Tax time is not only a time to “file” but to set the foundation for managing your finances. Here are a few tips to help you set that foundation:
Use Tax Time as Reason to Put in Place Building Blocks for Your Financial Management. For many entrepreneurs, money issues are a struggle. The technologist would write code all night long, but ask them about accounting and taxes and they shut down. Filing your taxes can expose you to the basics of financial management such as getting the right accounting system in place. This lets you not only “press a button” next year to file your taxes, but helps you manage billing, collections and generating financial reports to manage your business.
Don’t Skimp on Financial Help. Whether it is a consultant, outsourced CFO or just a friend with a tax and finance background, no need to figure this out on your own. There are plenty of experts that can help – even if it is just to file your taxes.
Get The Right Software. Every business needs a basic accounting package. And if you don’t believe me, you certainly will when it comes to tax time. Which of the following is you? You cobble together receipts, bank statements, phone records and credit card statements to piece together your tax return. Or you “press a button” inside your accounting package and it generates your financial statements (and even your tax filings). If you haven’t done so, use tax time as an excuse to finally get software to manage your finances.
Make Sure You Have the Proper Legal Entity. The legal entity you use – sole proprietorship, partnership, limited liability company (LLCs), or corporation – has an impact on taxes. For example, certain entities – such as LLCs and corporations that have elected “S” corporation status – pass profits and losses to the owners. This means that company losses are offset against any other personal income. You can’t do anything about this for 2017, but consult a CPA or lawyer to have the right entity going forward.
Understand Net Operating Losses. Many small businesses lose money in the early years as their business is growing. These losses – sometimes called Net Operating Losses or NOLs – can be carried forward or carried back. This allows you to offset these NOLs against income in years you make money so you reduce taxes in those years. Talk to your CFO or finance contacts to help you take advantage of these to reduce your taxes.
Put these elements in place and you will be in much better shape to manage your finances and be prepared for next year.
MANAGING THE FILING PROCESS
The tax filing process can be daunting so here are a few tips to help:
Take Advantage of Tax Filing Services. Whether it is your accountant or tax preparation services, don’t try to figure this out on your own. These experts and services have been there and done that.
E-file your tax returns. To have the confidence that your tax return is received on time, you should file electronically. When you e-file, you receive a confirmation # once the IRS has successfully received your tax return. This is a much better alternative than dropping your return in the mail and wondering when or if it will be received. If you are expecting a refund, an electronic tax return will be processed faster than one received via mail.
Dates Changes and Deadlines. There have been several changes to deadlines for tax filing for small businesses:
Sole Proprietorships and Single-Member LLCs: Many self-employed individuals operate as a sole proprietorship with no formal, separate legal entity. Or they may opt for a single member LLC (considered a “disregarded entity”) unless an election is made to be taxed as a corporation. In either case, your net business income will be reported on Schedule C of Federal Form 1040—your individual income tax return. The deadline for the 2016 Form 1040 is April 18, 2017, but can be extended to October 15.
Partnerships: Should file a Form 1065 and Schedule K-1s. The due date has changed to March 15 (it used to be April 15). However, the extension deadline is still Sept. 15.
S Corporations: Should file a Form 1120 S, and the deadline is also March 15. Like Partnerships, the extension due date is still Sept. 15.
C Corporations: Corporations whose year ends on Dec. 31 should file Form 1120 by April 17 (it used to be March 15). If you file an extension, it is due Oct. 16. If you file an extension, the estimated payments you owe are still due on your given tax deadline. The extension is for the filing only.
An accountant or CFO will know these filing rules but knowing enough to be dangerous can only help.
COMPLYING WITH RULES AND TAKING ADVANTAGE OF BREAKS
There are many opportunities for small business to take advantage of the latest in tax write-offs. But you need to make sure you are doing them right and also complying with the latest regulations. Here are some guidelines to help.
Start-up Deductions. You can deduct up to $5,000 of organizational and start-up costs. Any amount exceeding $5,000 should be capitalized and amortized.
Deduct Your Health Care Premiums. If you have an individual health plan and pay premiums without tax breaks or subsidies, claim premiums as a deduction. To claim this , you must be a sole proprietor, partners in partnership, an LLC, or S corporation shareholder who owns 2% of company stock. Let’s say you are a sole proprietor and your business/personal income was $60,000 and your state. And federal income tax obligations are around 30%. If you spent $10,000 on health insurance premiums for you, your spouse, and your dependents, you can deduct that to make your total income $50,000 instead of $60,000. This saves you around $3,000 in total income tax payments.
Home Office Deduction. Rent payments for business leases are clearly deductible, but what if you run the business out of your home? The key is regular and exclusive use of the home office. Under the simplified method, multiply the square footage of your home office space (maximum 300 square feet) by $5.00. Therefore, the max deduction under this method is $1,500. The regular, more complex method considers the percentage of your home dedicated to an office. Click here to visit IRS.gov, and find out if you meet the requirements to take this deduction.
Home Furnishings. If you have a home office, you’ll need to have chairs and other furniture to make it a comfortable place to work. At night, you might even roll the same leather chair you use in your home office out into your living room. This allows you to enhance your home with purchases that also qualify as tax write-offs.
Bank Fees. Bank fees for your business accounts may be deductible. For example, if you need cash to pay a delivery person and have to use the ATM next door, the $3.00 fee can be deducted. Similar deductions are available for cash-advance fees on credit card transactions. These are all deemed legitimate and necessary costs of doing business.
Cell Phone. A portion of the device’s cost and the cost of a service plan are deductible. Let’s say you use around 30,000 minutes per year on your phone, for both personal and business reasons. You spend around 60 minutes a day on business calls for the average work week. That’s around 15,600 minutes a year you will spend on business calls (60 minutes/day x 5 days x 52 weeks) — over 50% of your total yearly phone minutes. In this scenario, you could deduct over 50% of total annual personal cell phone costs as a business expense. The key is to make sure you are getting an itemized list of your monthly phone bill, so that you have evidence in case of an IRS audit. Get a separate business number that routes to your phone, making incoming calls much easier to separate. Assuming a $100-per-month phone bill (average bill over $100/month) and a 50% deduction, you could save an extra $500 in deductions ($100/month x 12 months x .50 deduction).
Coffee. This is one of the most commonly forgotten write-offs of all. When you stock coffee at the office or make it at home while working, deduct it as a business expense.
Write off Business Meals. If you are the sole owner, business meals should be classified as such, but you’ll only get to deduct half the cost. If you are an employer and treat your team to lunch or dinner, you can deduct the full cost of the meal. Always think about the purpose behind the meal:
Promotional with clients or prospects – 50%
Morale-building with employees – 100%
Keep receipts with notes about who you were with and the results of every just in case you’re audited.
Lunch Meetings. You can deduct 50% of meals that are considered business-related. This includes taking a client or even a potential client out to lunch. It could also include ordering pizza for the office as a special treat for your employees. Just make sure that these meals are not lavish or extravagant. A good rule of thumb is to treat your business finances as if they were your personal funds. Don’t dine at that new restaurant or play golf at that country club just because you can write off half. As long as the expenses are reasonable, you are allowed to deduct 50% of meal costs when eating with business partners and employees . If you buy lunch every day and spend around $8, you can deduct $4. If you do the math, that amounts to over $1000 a year in claimable deductions ($4/day x 5 days x 52 weeks).
Auto Expense Deduction. If you use your car in your business, you can deduct car expenses. You can choose one of the following methods for this deduction:
Standard mileage rate. For this method, you would multiply the total miles driven for business by the mileage rate for the year. For 2016, the standard mileage rate is 54 cents. Auto expense deduction covers more than just business miles. You can deduct mileage driven for medical purposes as well as miles driven for charitable purposes. It is always important to track your mileage for both business and personal purposes as a LOT of personal miles can be deducted. There are tools to do this such as this one from Quickbooks http://quickbooks.intuit.com/self-employed-center/new-mileage-tracking-feature-and-partnerships-to-help-freelancers-year-round/
Actual Car Expenses. You can deduct actual car expenses like gas, repairs and insurance. However, if you use the car for personal and business then calculate the percentage used for business purposes first and then apply that percentage to the total car expenses. For example, if you drove your car a total of 15,000 miles and based on your mileage tracker 6,000 of those miles were for business then you would divide 6000/15000 that equals 40%. Therefore, you can deduct 40% of your total car expenses as a business deduction. If you want to take an auto deduction for a car that you lease, click here to see what the requirements are to do so.
For more on expenses you can visit: business expense page
Affordable Care Act Tax Issues. Small businesses must follow all rules and regulations regarding ACA taxes, including:
Healthcare Reporting: Businesses with 50 or more full-time employees are required to offer qualified, affordable health insurance or pay a penalty. This should be done using forms 1094-C and 1095-C. The IRS has a FAQ page about these forms here.
Healthcare Tax Credit: Businesses with less than 25 full-time employees who pay an average salary of $50,000 or less – but offer these employees coverage through the SHOP Marketplace and pay at least 50 percent of their premium costs – can qualify for a special tax credit. To find out if you are eligible, go here.
Take Section 179 Deduction. This deduction allows you to recover the full cost of equipment or property up to $500,000 purchased for your business in the same year that you purchased it. This beats recovering the cost over a period of time like 5 or 10 years through depreciation deductions.
Work Opportunity Tax Credit: This tax credit is available to business owners who hire individuals from target groups that have traditionally faced barriers to employment. This includes military veterans, TANF and SNAP recipients and ex-felons. The credit is 25 or 40 percent of the employee’s first year wages, with limits set for target group. You can learn more and see if you qualify here.