Ah, tax season. I think it is safe to say that most people do not look forward to this time of year. However, it’s my job to ensure that you feel cool and confident about the upcoming deadline. Here are some tips for small business owners:
1. Know your legal structure.
Many self-employed individuals operate as a sole proprietorship with no formal, separate legal entity. Or they may opt for a single member LLC, which is considered a “disregarded entity” for income tax purposes unless an election is made to be taxed as a Corporation. In either case, your net business income (all revenue less tax deductions) will be reported on Schedule C of Federal Form 1040 – your individual income tax return. The deadline for 2016 Form 1040 is April 18, 2017 but can be extended to October 15th. If you want to hire an outside tax preparer, begin looking now … several Certified Public Accountants (CPAs) and Enrolled Agents (EAs) adhere to an earlier, internal deadline for new client relationships.
If your business is organized as a C Corporation, S Corporation, or Partnership, the regular federal filing deadline for 2016 calendar year returns is March 15, 2017 but can be extended to September 15th. Tax filings for these entities are more complicated, so it is recommended that you hire a CPA with experience preparing these returns. State filings are especially tricky if you generate income in multiple states or overseas. If you don’t already have a relationship with a reputable accountant, please establish one now!
2. Get organized.
Regardless of legal ownership, get all tax data in one place. If you use a bookkeeping program like QuickBooks or Xero, ensure your 2016 records are updated and in order. Income and withdrawals should be classified appropriately. If you don’t know how to classify a transaction, bring it to your accountant’s attention with a simple “Unidentified Expense” or “Ask my Accountant” category. Rely on your accountant to classify it correctly and teach you where it goes in the future.
In my other firm SV CPA Services, our tax program ProConnect Tax Online integrates with QuickBooks Online. If we oversee or have access to a client’s QuickBooks Online file, we can more efficiently prepare the business tax return. Find out if your tax preparer has a similar tech integration – it may lower your fee!
3. Deduct up to $5,000 of start-up costs.
Was 2016 your first year in business? If so, you can deduct up to $5,000 of organization and start-up costs. Any amount exceeding $5,000 should be capitalized and amortized.
4. Understand the 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. Thus, the highest deduction under this method is $1,500. The regular, more complex method considers the percentage of your home dedicated to an office. Consult this IRS guide for additional info.
5. Write-off meals.
There is usually confusion surrounding business meals. If you are the sole owner & employee, any business meals should be classified as such, but you’ll only get to deduct ½ the cost on the tax return. 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:
a. Promotional with clients or prospects – 50%
b. Morale-building with employees – 100%
6. Be cognizant of overlooked deductions.
Auto, health insurance, interest on small-business loans, payroll taxes, office furniture, and marketing are just a few of the available tax deductions for small businesses. Many of these expenses, when personally incurred for employees, are not deductible. In other words, it pays to be a business owner!
For auto deductions, tracking business mileage separate from personal mileage is essential. It would be too difficult to explain each tax deduction in detail here, so consult a general guide like this one from Fundera.
Even if you hire an accountant to assist with business tax compliance, you assume ultimate responsibility for tax filings. Any 2017 tax cuts won’t apply to the 2016 tax year, so take advantage of tax write-offs now. When in doubt, consult a tax professional with the expertise to maximize your deductions. Oh, and try not to stress too much!
Until next time,
Deb Meyer, CPA, CFP®