Small Business Tax Planning

an Open sign in the window of a small business

When starting a new business there are many things that need to be learned to run your business correctly. One thing that you will learn quickly is that filing taxes for a business is much more complex than filing taxes for an individual. As a tax professional, I would always recommend hiring a tax professional to advise you on any tax filing

When you have a business, the knowledge of a true tax professional, either an Enrolled Agent or a CPA will save you far more money than you must pay to hire them. Also, there are so many mistakes that can be made when filing taxes for a business it makes sense to have someone who knows what they are doing to prevent an examination or audit

Today I will start with going over a lot of the mistakes that can be made on the filings. I will also discuss some of the most valuable tax deductions that can be used for a small business. Hopefully, by this point in the article, you have seen just a small part of the immense value of hiring a tax professional. From here I will lay the things you should be doing throughout the year and in preparation to meet with your tax professional so they can get the most out of your filings and save you money.


Common Tax Planning Mistakes That Can Cost a Small Business Owner

After all your hard work throughout the year, it is bad enough that you must fork over large amounts of your income to the IRS in the form of taxes. What is even worse is making some of these common mistakes and seriously overpaying.

One of the biggest and most common mistakes is the misreporting of income. All 1099’s that are sent to you are also sent to the IRS as well. You will not only need to include all income on the tax filing, but you must make sure it is all listed in the correct place. The IRS has a computer system that matches what has been reported to them and what has been reported by you. 

If you fail to report some of your income this system will detect that as well. So, this is not a mistake that you can typically get away with. When this is noticed the IRS will come back and adjust your filing and assess you with penalties and interest for the mistake.

Another common mistake is the overreporting of income. Not all your business income is taxable. With a business, it takes money to make money. When filing your taxes, it is important to utilize allowable deductions to reduce your amount of taxable income

People always like to speak about their gross income instead of their actual profit. Utilizing your business expenses and reducing the taxable income down to your companies’ actual profits can save you thousands of dollars in the taxes you have to pay. 

It is especially important not to mix your personal and business finances. Keeping separate records will make it much easier to track deductible expenses. Also, in the case that the IRS decides to do an examination or an audit, having these separate records is a necessity.

Another big mistake that is made is not tax planning. Sitting down with a tax professional and doing tax planning for the future year that you are in not just dealing with the past year in the tax filing. Setting yourself up with good record-keeping for expenses is one thing that can help you save on your overall tax liability. 

Also setting up estimates with the IRS will help you avoid a surprising and scary bill you may not be able to afford once you file. The last thing you want to do with a business is to start being behind with the IRS. They immediately start accruing penalties and interest if late which can set up a business to overpay on taxes drastically. 

Tax planning also helps you to be prepared to file on time or early rather than waiting for the deadline. If you miss the deadline, you are immediately assessed a late filing penalty that is a percentage of what you owe. Check out the IRS website to see all the different penalties that can cause your business to overpay on taxes. 

These are just a few examples of the mistakes that can be made when it comes to taxes that can be prevented with a good tax professional and some good tax planning. Some of these mistakes seem very easily avoidable but remember as your business grows the more complex the filing becomes and the easier it is to make these types of mistakes. 

In the next section, I will go through some of the most valuable deductions that can be utilized so you do not make the mistake of overpaying your taxes.


Valuable Tax Deductions Not to Miss

As I have mentioned, a few major benefits in filing your taxes are utilizing deductions to lower your taxable income. Many people call these write-offs. A tax deduction is an expense that you can deduct from your income to reduce your taxes due

In this section, we will discuss just a few examples of common and valuable deductions. Consult with your tax professional to see which ones you can qualify for from these examples and the many other deductions available.

One quite common deduction that has become even more common since the coronavirus has forced so many to work from home is the home office deduction. If you are self-employed or a business owner, you may qualify for this. If you use this space exclusively for business purposes and this is your primary place of business, you should be able to use this cost as a deduction.  

If you use your vehicle for business purposes, then you should be able to use the car tax deduction. If you have a car purely for business then you can deduct the vehicle’s entire operating cost. If your vehicle is used for both personal and business, you can only deduct the business usage costs. 

These expenses can be calculated in two different ways. You can use the standard mileage rare. This is where you track the miles driven. The other option for vehicle expenses would be the actual expense method. This would be keeping track of your actual expenses such as gas, oil changes, repairs, tires, insurance registration, or lease payments.  

If you spend money on advertising or any other costs to promote your business these are expenses that can be deducted as well. 

If you are someone who loves to wine and dine your clients, you may be able to deduct up to 50% of qualifying food or beverage costs. To be eligible for this deduction the expenses must be an ordinary part of running your business. 

If you need to hire legal representation throughout the course of the year in many circumstances this expense can be deducted. Telephone and internet costs can even be deducted. 

These are just a few of the many different expenses that can be utilized to reduce your taxable income. For more examples of these expenses see this great article in Forbes magazine. 

To take advantage of these and all the other deductions, organization and keeping records is a must. Keeping good records and having all the proper paperwork ready for when you visit your tax preparer will give them the ability to use everything within tax law to save you money. 

Below is a list of documents that you should gather and bring to your visit with your tax professional.

  • A complete and up to date trial balance
  • Records of current year major asset purchases, disposals, or lease arrangements
  • A copy of their 2019 tax return if you didn’t prepare their tax returns last year
  • Any documentation related to federal or state credits being claimed
  • Mileage logs
  • Documentation of federal and state tax payments made
  • Names, addresses, and FEINs of vendors paid that may need 1099-MISC issued
  • Any payments made from their accounts or credit cards that were not recorded in the company records
  • Details of loans and any advances or repayments between the business and owners
  • Annual payroll records
  • Any distributions from equity owners

Mistakes are still going to be made by any business owner but limiting those mistakes and missed opportunities can save a business owner a lot of money. Consulting with a tax professional and being proactive with your tax planning can keep you off the expensive hamster wheel that a lot of business owners find themselves on. 

Also, tax law is constantly changing so having a true tax professional is a must to keep up with new laws that can benefit your business. 

In conclusion, do not be the business owner who is freaking out come tax time. As you see with a lot of work throughout the year and the correct tax professional filing your taxes can be quite easy. You work hard for your money throughout the year, so it only makes these to keep as much of it in your pocket come tax time.