Everybody wants to lower the amount they pay in taxes, but it is an especially important goal for small business owners, who often face steep challenges to profitability. Every penny in taxes avoided are a double victory: you avoid overpaying and add to your bottom line.
Though you may think to overpay would be a rare occurrence, according to an article personal finance expert Garrett Gunderson wrote for Forbes, it’s something that 93 percent of small business owners report having done. You don’t have to be an expert on taxation to avoid making this mistake yourself. Read our tips to learn where the biggest pitfalls and potential savings are.
1. Use Your Home Office to Your Advantage
If you’re running your business from your home or a property that you’re renting, you’re entitled to a significant break for the expenses you can attribute to running your office there. Figuring out the right amount will take a little bit of calculating, as you’ll need to figure out what percentage of your house that you’re using for the business and then apply that percentage to expenses like mortgage interest, repairs and utilities, internet and phone contracts, maintenance costs and insurance.
2. Your Vehicle Expenses Are Another Potential Deduction
If you’re using your vehicle for business purposes as well as for personal, you need to figure out how much of its use is attributable to each, and then take the percentage that goes to your business as a deduction. You can choose between two different ways of doing this – either track the actual miles you travel for business and apply the standard mileage rate prescribed by the Internal Revenue Service, or apply the percentage against actual expenses, whichever turns out to offer the greatest financial benefit.
3. Get Into the Habit of Keeping All of Your Receipts
There are plenty of jokes about taxpayers walking into their accountants’ offices with boxes of unsorted receipts, but the truth is that keeping your receipts is essential. Anything that you pay for that goes towards operating your business represents a potential offset and deductions, and instead of using that proverbial shoebox you can download an app or accounting software that will sort it for you and help you keep organized. One of them is even called Shoeboxed, but other goods one include Receipt Bank, Wave, and QuickBooks.
4. Cut Your Taxable Income While Saving For Your Future
As tempting as it is to keep your profits and use it immediately, if you make a point of putting some of your extra income into a retirement fund, you provide yourself with a dual benefit. Not only does doing so cut the amount of income on which you have to pay taxes, but also builds your retirement account with money that you won’t have to pay taxes on until you’ve retired. Though you can’t do this to an unlimited degree, if you’re under 50 you can fund a traditional or Roth IRA with as much as $6,000 in 2019, and if you’re over 50, that number bumps up to $6,000 plus a $1,000 catch up provision. You don’t put in more than you can afford, so talk to your financial advisor to figure out what works best for you.
5. Bring Family Members On Board for Tax Savings
Not every business works for hiring family members, but if you can do it and show that the relative is doing something essential to your business, you can take a business deduction on what you’re paying them. This not only lowers your taxable income but might also mean skipping having to pay the FUTA and FICA taxes you would have to pay for employees outside of your family.
6. Don’t Forget About your Equipment
While big businesses often have to depreciate their business equipment expenses over a period of years, small business owners are advantaged by Section 179 of the tax code, which allows them to use their equipment expense on everything from computers, office furniture, and fixtures to much bigger and more expensive equipment in the year they buy the equipment.
7. Finally, Don’t Forget About Your Carryovers
There are plenty of times when the credits or deductions that you’re entitled to can’t be used in a single tax year. When that’s the case, and they are eligible for a carryover, that carryover can last for years – but only if you remember to use them. Make sure to record any net operating losses, capital losses, home office deductions and charitable contribution deductions that you can’t fully take in a single tax year and write yourself a red letter note to make sure that you apply them each and every year until they’re exhausted.
Owning your own business is an exercise in keeping a bunch of balls in the air at the same time, but by keeping yourself organized and keeping track of these deductible items, you can end up giving yourself a significant financial advantage.
With taxes and complexity, it is wise to consult with a CPA to make sure you are taking full advantage of the tax code.
Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
