For most entrepreneurs, tax time is probably the most stressful time of the year. This is mainly due to the fact that we scramble to prepare our taxes at the last minute — instead of working on them throughout the year. As a result, we end-up missing out on deductions, or even worse, get penalized for making a mistake.
To prevent any mishaps this tax season, here are 50 business tax tips that entrepreneurs miss when doing their taxes. With this information, you can rest assured that you’ll receive the right deductions, while also avoiding unnecessary fines or penalties.
1. Deduct your home office and utilities.
Since this is a fairly new tax deduction, it was enacted in 2013, it’s not surprising that most entrepreneurs aren’t familiar with it. As noted by William Lipovsky in a previous Due post, “The home office deduction allows small businesses that operate out of a home to deduct $5 for every square foot of space used for the business, up to 300 square feet.”
“So, for example, a business that operates out of a person’s 275 square foot basement workshop would be eligible for a $1375 deduction.”
If you’re taking a home office deduction, then you can also deduct a portion of your utility bill. In most cases this applies to your monthly heating and electricity bills. However, you may be eligible to deduct the same percentage as the rent/mortgage deduction described above. You should also be able to claim your internet and phone use.
Staying on top of these deductions and other is much easier when you use an app like 1tapreceipts. This machine learning-enabled receipt app starts to understand you and your tax needs as it captures and organizes more of your expenses, including receipt photos invoices sent via email. It works with tax codes to determine what can be deducted and arranges those for easy viewing and use when it’s tax time.
2. Office supplies.
How about all of the paper, ink toner, postage, and paper clips that you’ve purchased? Yep, this is one of the best business tax tips. They’re all fully deductible – provided you can prove that being used for business.
How about that shiny new computer or iPad? These items can also be deducted. However, if you’re using the same computer or tablet for personal and business use, then you can only deduct the percentage of how often the equipment is used for business.
3. Advertising and subscriptions.
As reminded again by William Lipovsky, “Most businesses, big or small, have to spend considerable amounts of money on advertising, and it is tax deductible. This is yet another tax break that many small businesses fail to take advantage of.”
This not only includes “print, television, and digital media advertisements, but also “promotions directly related to the business, such as sponsorships, brochures or flyers sent out, business cards, and even display racks highlighting products.”
Additionally, software purchases and subscriptions that you use for marketing, accounting, or inventory are also deductible. This is also true for any periodical subscriptions that your business has paid for.
All those rides going to the airport or to other cafes meeting clients. Yes. In addition to reporting the income (Form 1099), you may be able to deduct business mileage – even if you used your personal vehicle.
5. Travel expenses.
Did you or your employees hit the road for business this year? Everything from airfare, lodging, drycleaning, and even 50 percent of your meals is fair game. Even renting essential work related equipment and the cost of entertaining prospective clients can be claimed.
6. Do lunch.
This is a time-honored tradition but it’s also one of our favorite business tax tips. But, it can also get a little confusing for most business owners.
For starters, you can only deduct 50 percent of the meal. Additionally, the meal can’t be extravagant. For example, spending a $100 on a meal and deducting half is acceptable. Flying your client to New York City and dropping a grand for lunch is a no-no.
7. Startup costs.
These are the expenses that you have before your business launched, which adds up to one of our biggest business tax tips savings. These could include:
- Legal and accounting fees
- Licenses, permit, and other fees
- Cost of research and development
- Employee training
- Expenses related to obtaining financing, suppliers, customers, or distributors.
- Long-term assets like computers, equipment, and office equipment.
- Costs you incur to form a partnership, limited liability company, or corporation.
8. Upgrading your office.
If you’ve purchased a new desk, office chair, bookcase, task lamp, or any other type of office or workplace upgrade, then they can be deducted keep in mind that these are all allowable deductions.
Keep in mind there are two ways to claim a deduction. All at once in the year when you made the purchase or gradually over the life of the property,
9. Health insurance.
Self-employed, individuals, or if you have less than 25 employee, may be able to deduct the cost of their health insurance for themselves and their family. However, you’re not permitted to deduct your insurance when you’re participating in an employer-subsidized plan through your spouse or partner.
10. Retirement plan.
Putting money into a tax-deferred retirement plan will lower your taxes — even if you just contributing to the minimum. Best of all, you can open a retirement like a SEP-IRA right before this year’s filing deadline. This means you could open a retirement plan in February and still file it in April.
To guide you along, the IRS has a tool to help calculate your plan contribution and reduction.
11. Business structure.
The structure of your startup will determine the tax benefits and liabilities you’re responsible for. Here’s a brief rundown via QuickBooks;
- Sole proprietorship is a business that owned and operated by just one individual. Taxes are based on this individual’s income and generally taxed at a lower rate. However, owners must pay their own self-employment taxes and are fully responsible for the full tax burden.
- Corporations are legally regarded as separate entities. As such, they have reduced legal liability. C Corporations typically have more expenses so they have a wider range of deductions, but the income collected is subject to double taxation. S Corporations pay individual taxes at the shareholder level instead of at corporate tax rates.
- Limited Liability Company is a “business structure that is formed in accordance with state law and provides its owners with legal protection from business debts and more options regarding managerial structure.” This means that LLCs can distribute shares to as many parties as they like and can take advantage of several tax benefits. LLC owners must make quarterly IRS payments on their personal tax forms and also submit Form 1065.
- Partnerships refer to businesses that are owned and operated by two individuals. “Most partnerships are known as general partnerships (GP), and there are other variants, such as limited partnerships (LP) or limited liability partnerships (LLP).” Even though “GPs enjoy pass-through taxation, meaning that income is taxed through the partners instead of being subject to corporate tax rates, business owners in a GP risk personal liability if the company can’t pay its debts. On the other hand, limited partnerships protect silent partners from personal liability but restrict them from participating in the company’s daily operations.”
12. Going green.
Did you purchase a hybrid this year? You might qualify for the IRS Plug-In Electric Drive Vehicle Credit. Did you install solar panels in your workplace? You may be able to obtain a tax credit for going green.
13. Depreciation of equipment.
Regardless if you purchased used or new equipment for you business, you can claim a Section 179 Deduction, otherwise known as a Special Depreciation Allowance. This type of deduction is namely used for service-based businesses that require large machinery or computer systems. You can claim up to a maximum of $500,000.
14. Education expenses.
If you took a course or attended a workshop to enhance your skills, those educational expenses can be deducted. You can also claim textbooks, as well as, trade publication subscriptions or donations to business organizations.
15. Don’t mix personal and business.
Also an entrepreneur, it’s easy for the lines between business and personal to blur. It may not seem like a big deal to use the same bank account or credit card for all of your expenses. But, it is to the IRS.
Remember, the IRS doesn’t want you to deduct things like a computer, meal, medical bills, or mortgage if it’s not for business. Trying to trick the IRS will only result in an audit and/or penalties. To avoid this, keep all of your personal and business expenses separated.
16. To itemize, or not to itemize?
Depending on the state that you live and work in, it might be more beneficial turn out to use the annual standard deduction (for individuals).
17. File an extension.
While you want to make sure that you file your taxes by the deadline, sometimes you need just a little extra time to get organized in order to capitalize on deductions and credits. In this case, file an extension using Form 7004.
18. Combine a business trip with a vacation.
This will reduce your vacation costs. This is because you’re deducting the percent of the unreimbursed expenses that were spent on the business trip from your total costs. This includes airfare and even part of your hotel bill.
19. Quarterly taxes.
Businesses, including self-employed sole proprietors, have to pay taxes on a quarterly basis. If it’s your first year in business, however, you get a free pass.
To ensure that you don’t forget about your quarterly tax obligations, automatically set aside a percentage of each payment or revenue. Then, take stock of your profit/loss statement at each quarter so that you can pay your quarterly bill accordingly.
To get started, speak with a financial advisor. They can assist you in estimating these payments.
20. Keep track of all expenses.
The instant that you launch your business, you’re able to deduct all “ordinary and necessary” business expenses. Unfortunately, there are plenty of entrepreneurs who do not accurately keep track of these expenses.
Make sure that you document and record each and every expense. This may sound tedious, but thanks to apps like Expensify, Shoeboxed, and Mint, you can painlessly record manage and record all of your business expenses.
21. Keep tax documents for at least seven years.
Not only should you keep track of all your expenses, you should also onto these records for at least seven years. This includes expense receipts, client 1099 forms, and vehicle mileage logs. However, copies of business tax returns, licenses, incorporation papers, and capital equipment expenses should be kept indefinitely.
22. Know your tax year.
A tax year is the annual accounting period kept for reporting your income and the expenses you incur. This is either calendar year or fiscal year. However, there are specifics for adopting each and filing your taxes every spring.
Why is this important to know? Once your tax year is set, you have to get approval from the IRS to change it.
23. Send 1099s.
Did you pay any freelancers, contractors, attorneys or other individuals over $600 throughout the year? If so, you’re required to issue 1099-MISC forms to both the individual and the IRS. Not filing on time could result up to a $250 penalty for each form you had to send.
24. Over-deducting gifts.
While you are allowed to deduct gifts, such as a thank you gift in appreciation for a referral or advice, you can only deduct the first $25 given per recipient as an expense.
You can read more about deductible gifts here.
25. Signed, sealed, and delivered.
As a business owner, you’re bound to overlook the smallest of details occasionally. In this case, it could be forgetting to sign you form before sending it to the IRS. If you don’t, it’s considered invalid and you’ll have to re-file.
26. State taxes.
In case you weren’t aware, there are state and local taxes on top of federal taxes. Since each state has different requirements, it wouldn’t hurt to stop by your local Small Business Administration or accountant.
Also, if you have employees, you’re required to pay state workers’ compensation insurance and unemployment insurance taxes.
27. When and how you get paid matters.
For some entrepreneurs it may be better to take your employee bonus or self-employment income at a later date. By deferring your income it will reduce this year’s adjusted gross income, which can reduce your tax liability.
Services like Taxslayer let you file your taxes for free as well as estimate and schedule any type of refund you’ll receive. Not only is it effective to be able to use any device to safely file state and federal returns, but it also a benefit to ensure the maximum refund and know that money is on its way.
28. Stock up on supplies and equipment.
If you use the cash method of accounting, consider purchasing all of your supplies before the end of the year. Entrepreneurs who go this route are able to pay their bills on or before December 31, while still claiming the expense on a 2017 return.
29. Bunch medical deductions.
Here’s when working with a tax advisor comes in handy. They can assist you in determining if you have enough medical deductions to itemize (over 10 percent of adjusted gross income, 7.5 percent if age 65 or older). In some cases, it might make sense to “bunch” your medical expenses into one year.
30. Bunch miscellaneous expenses.
When it comes to taxes, there’s the basic tax equation is Income vs. Deductions.
This means that you should only deduct expenses if they exceed a certain percentage of your adjusted gross income.
The IRS allows for a two percent AGI floor for miscellaneous expenses, which includes professional fees like legal advice and tax planning. Don’t hesitate to discuss unreimbursed business expenses, such as travel and vehicle costs, with your tax advisor.
31. Double-check your withholding payments.
Do you believe that you have underpaid your tax liability throughout the year? This may result in a penalty. The good news is that you may still have time to correct this problem by increasing your withholding on your salary or holiday bonuses.
Again, work with a tax pro. They’ll help you determine your estimated tax payments. This way you can make a larger payment now so that you won’t get hit with penalties for previous quarters.
32. Get into the giving spirit.
If you haven’t done so yet, now is the time to make any charitable donations. After all, this is the season of giving. If you have a unsold or unused inventory, you can donate these items as well. If the amount is greater than $500, however, there will be stricter reporting rules.
33. Beyond the classic IRA.
A Roth IRA has a limited contribution amount. So a better retirement option may be the individual 401(k). Not only are annual contribution limits are higher than, you can make Roth 401(k) contributions with after-tax income.
34. Open a Health Savings Account.
Do you pay a lot of money out of pocket for health-care services? If so, you may want to open a Health Savings Account, or HSA. With this type of account you can set aside money, pre-tax, that you can use whenever for qualified health-care costs.
“I’m a big proponent of HSAs. They’re a triple tax break–there’s nothing like it in the tax code,” says Barbara Weltman, a small-business tax expert and author of J.K. Lasser’s Small Business Taxes. “HSA contributions are tax-deductible, tax-deferred, and tax-free.”
As an entrepreneur you can put up to $3,400/$6,750 into an HSA per year depending on if your marital status.
35. E-file your tax returns.
Instead of relying on snail mail, start filing your taxes electronically. Programs like TurboTax allow you to e-file your federal tax return for free. And you’ll receive a confirmation number that the IRS has successfully received your tax return much faster.
If you have to file state taxes you can also do that electronically with TurboTax, but for an additional fee.
36. Get paid through dividends.
Here’s a little trick from the one-percenters that business owners should be aware, via Ally Hirschlag on Upworthy: “you pay less taxes on dividends than you do on salaried money.”
“So if you make less than $400,000 a year and you turn a good portion of your income into dividends (a distribution of your company’s earnings to its shareholders), you’ll only have to pay a 15 percent income tax on it. However, you’ll still need to designate a reasonable amount of your income to your salary; otherwise, you’ll get some negative attention from the IRS.”
37. Make it a family affair.
“Generally the Number One expense a self-employed person has other than housing is medical costs,” writes CPA Bob Jennings.
“For the self-employed person with a spouse there is a very simple, secret solution. First, hire your spouse for a valid work purpose and treat them as a real employee. Then, set up an health reimbursement account (HRA) to reimburse the spouse for any medical costs that the family incurs.” This will make all “medical expenses valid, real business deductions as an employee fringe benefit.”
If you have children, then hire them as well to avoid income tax. If they’re under the age of 17 you don’t have to worry about Social Security taxes. You can also deduct their salary as a business expense.
38. Stock options and 409A.
As Richard Harroch explains on AllBusiness.com;
“Stock Option Plans are an extremely popular method of attracting, motivating, and retaining employees, especially when the company is unable to pay high salaries.
A Stock Option Plan gives the company the flexibility to award stock options to employees, officers, directors, advisors, and consultants, allowing these people to buy stock in the company when they exercise the option.”
The downside to Stock Option Plans is the possible dilution of other stockholders’ equity if employees exercise their stock options. For employees, the disadvantage is lack of liquidity.
So what does this have to do with your taxes? Well, when you grant stock options your company needs to make a determination of the fair market value of its common stock. This way you can set the exercise price of the option – which is pursuant to Section 409A of the Internal Revenue Code.
Typically, this is done by hiring a third-party valuation expert.
39. Sales tax issues.
Most businesses are subject to sales tax whenever they sell or lease goods or services. This is calculated by multiplying the purchase price times the applicable tax rate. The applicable tax rates vary by state, but other states, cities, and counties have additional sales tax.
As a seller, you’re required to collect sales tax at the time of sale and file tax returns to the state and city/county that imposes said sales tax.
40. Payroll tax issues.
You’re responsible for paying state and federal payroll taxes on employee compensation. Typically, this is calculated as a percentage of the salaries the company pays to its employees and are withheld from employee pay. This also includes amounts paid for Social Security and Medicare.
Failure to address payroll tax issues can be detrimental to your business due to severe penalties. In fact, the IRS takes this matter so seriously that it could result in the loss of your business.
41. Net operating losses.
If you’re structured as a C Corporation, then your tax losses produce no current tax benefit. However, they may be considered as “net operating losses” (NOLs). This will offset taxable income in the future.
42. Employee vs. Independent Contractor.
As the IRS notes:
“It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”
As such, many entrepreneurs prefer to work with contractors since they don’t have to pay Social Security, Medicare taxes, and unemployment taxes, or health insurance.
Misclassifying workers can irk the IRS, so make sure that you classify your employees properly.
43. Don’t pay double.
If you accept payments through platforms like Square, Stripe, Paypal, and Shopify you may be confused to who’s responsible for providing required tax documents.
These documents are referred to as 1099s and they list the total payment made to contractors throughout the year. Traditionally the responsibility to fill out and return 1099s falls to the party paying for these goods and services — your client. However, since platform like Square and Paypal are the entities paying you, it’s actually their responsibility to provide these forms.
44. Stay in-the-loop.
Every year there are tax modifications, as well as new procedures and deductions. Since you’re not probably going to receive an email about these changes, it’s your responsibility to up-to-date about these changes by checking the IRS’s website.
45. Don’t go it alone.
As an entrepreneur, it’s in your nature to do everything on your own. Set your ego aside and seek out the advice of a CPA, Enrolled Agent, or other tax professional. They’re not as expensive as you may think and they’ll be able to the most favorable tax deductions and benefits.
If you don’t have an accountant, here’s 25 tips that will help you find the best accountant for your business.
46. Allow your CPA and financial advisor to talk to each other.
Give your permission for your CPA and Financial Advisor (CFP®) to talk to each other. The reason? Your advisors are not allowed to discuss your information without your permission.
By granting permission you’re helping them work with each other, which means all relevant and accurate tax information can be sent to the IRS faster.
47. The sooner, the better.
Entrepreneurs should start on their business taxes before the end of the the year. As explained in a previous Due post, this is because:
- It will save you time and money in the end since you’ll be able to file your taxes faster and easier.
- It prepares you for you how much you owe the government.
- Gives you time to make any changes – which could lower your tax liability.
- Allows you plenty of time to meet with an expert.
- The sooner you file, the sooner you’ll receive your refund.
This is one our business tax tips designed to save you the most time and money.
48. The IRS isn’t your enemy.
Did you mess up some math? The Feds aren’t going to come to your door and lock you up. Typically you’ll be charged the tax you owed plus interest. And, if this is your first time making a mistake, they may even waive the penalty. Now, if you’ve knowingly committed fraud, it’s time to get in touch with your attorney.
49. Don’t panic.
I remember seeing news stories about taxpayers rushing to the post office just before midnight to beat the federal tax filing deadline. The truth is, forget everything you heard about this deadline, especially when you can file your taxes electronically.
If you’re not able to meet that deadline in April, you don’t need to panic. This is one of our most important business tax tips. The IRS allows a no-questions-asked, six-month extension to file your federal income tax returns. Keep in mind though that you are still required to paying what you owe by the deadline.
50. You don’t have to talk to an auditor.
Let’s say you do get audited. Should you talk to an IRS auditor? Nope.
“As a matter of fact, going or talking to the auditor yourself is the worst thing you can do” writes the Law Firm of Lance R. Drury.
“The taxpayer Bill of Rights allows you to be represented by a qualified practitioner who can answer questions for you and provide documentation to the IRS. Many taxpayers attempt to handle their own audit or hire the person who prepared the tax return to handle it for them. The reason this usually does not work out is because most tax return preparers do not handle IRS audits on a daily basis. The IRS can easily intimidate them, which usually results in an unfavorable outcome.”
Bonus business tax tips: When do you have representation, you improve the chances for a successful tax resolution. Furthermore, you’ll have a better chance of cutting a deal with the IRS which will resolve the audit more swiftly and less expensive than thought.