Taking care of your taxes throughout the year can make a big difference for companies.
By Alexandra Walsh
Running a business is hard enough without adding the complexity of filing taxes each year. And tax-filing season is officially just around the corner for all of us.
The key, experts say, is to work with an accountant throughout the year and not just when you prepare your tax return. From some tax experts, here are more tips and best practices in tax preparation and business accounting for small businesses.
Keep Organized
Keeping all your business records and receipts will save you headaches when it comes time to calculate business expenses.
Another tax-saving tip for small business owners is to open a business account at a bank and make all business-related purchases from that account. At the end of the year, you’ll be able to see all your business expenses in one place.
The most important step to minimizing your small business tax is to make sure you deduct every dollar you spend on business expenses. This means being organized.
Tax returns should never be compiled based on a box full of receipts. You’ll never know if you lost a receipt, and therefore, missed the deduction.
- Here are some more organization tips:
- Use bookkeeping software to track your bank account activity; by tieing your expenses to your banking activity, you’ll be sure to capture all of your business expenses.
- Prepare your return based on the financial statements generated by your bookkeeping software.
- Save receipts by either placing them in a file or attaching electronic copies to the transactions in your bookkeeping software.
Manage Payroll
Hire a company to assist with payroll. However, do your homework and make sure that the company is reputable.
To save money, some business owners will hire a lesser-known payroll service only to find out later the service wasn’t remitting payroll taxes for the company. When that happens, the business owners are on the hook for the payroll taxes.
The IRS typically checks every quarter to see if payroll taxes are being paid.
Advice on the Business Plan
A good accountant will give you advice on how to grow your business. Make sure to seek out their advice to determine how much to contribute to your retirement fund and whether you should take a bonus or delay it a year.
Your accountant can tell you things such as if buying a small space for your business rather than renting can save you money.
Separate Business from Personal Expenses
If the IRS audits your business and finds personal expenses mixed in with business expenses, regardless of whether you reported business expenses correctly, it could start looking at your personal accounts because of commingled money.
Always get a separate bank account and credit card for your business and run only business expenses through those accounts.
Invest in a Business Building
If you’re currently renting your business property from a third party, ask your accountant whether buying a building to house your business would be advantageous.
Business buildings are a great tax shelter because you can deduct the expense of the building while the value of the building actually increases.
Deduct Section 179 Property
Small businesses can opt to deduct the full amount of certain property as expenses in the year the business began using them, according to TurboTax.
This is referred to as “Section 179 property” and can include up to $1,080,000 of eligible business property in the 2022 tax year.
Some eligible deductions include:
- Property used in manufacturing, transportation, and production
- Any type of facility used for business or research
- Buildings used to hold livestock or horticultural products
- Off-the-shelf computer software.
Excluded are:
- Land
- Investment property
- Land outside of the United States
- Buildings that provide lodging
- Buildings that are used to store air conditioning or heating units.
Bonus Depreciation
Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017.
The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used.
The new rules allow for 100% bonus “expensing” of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, in 2024 to 60%, in 2025 to 40%, and in 2026 to 20%. After 2026 there is no further bonus depreciation.
This bonus “expensing” should not be confused with expensing under Code Section 179, which has separate rules.
Deduct Appreciable Stock Contributions
Many small businesses make charity contributions throughout the year and deduct the amount that is donated. A way to maximize these contributions is to donate appreciable stocks instead of money.
The business can deduct the current worth of the stock at the time of contributing, as opposed to what the stock was originally purchased for.
Classify Your Business Correctly
Most businesses are classified as pass-through businesses, which includes sole-proprietorships, partnerships, S-corporations, and limited liability companies. The profits for these businesses flow through to the owners or members and are taxed as personal income.
On the other hand, the profits for C-corporations are subject to corporate income tax. Depending on the type of business you own, reclassifying as a C-corporation could allow for higher deductions.
Most pass-through businesses can deduct 20% of their business income when calculating their federal income tax. However, certain types of service-based firms like legal, medical, or accounting practices may not get a deduction if their income is over a certain threshold.
Therefore, make sure you have the right classification.
Hire the Right Accountant
One of the best small business tax tips is to hire a trustworthy, skilled accountant to help you with your taxes. Since many tax-saving tips and deductions are only applicable to certain business entities, it can be easy to make a mistake when claiming items.
Hiring an accountant can mean the difference between a problem-free tax return and an audit. To find the right accountant, ask colleagues, friends, and family for personal references.
On the other hand, you could find a CPA in your area who has excellent reviews. Before deciding on an accountant, have an introductory phone call to see if they are the right fit.
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Handling the taxes for your company doesn’t have to be a big pain. Knowing and following some of these tips can make the process run smoothly . . . and at the same time help your company maximize its revenue.
Alexandra Walsh is the vice president of Association Vision, a Washington, D.C.–area communications company. She has extensive experience in management positions with a range of organizations.