Every business owner needs to know and understand both the federal and local tax requirements to know their tax deductions, file tax accurately, and make payments on time.
In as much as the business structure that you choose when starting up determines the tax you will pay, knowing some small business tax tips can help have a well-organized system. This way, you will also learn how to maximize your savings.
Here are some tax tips for small business owners you should know.
1. Classify Your Business Correctly
Different businesses belong to different tax brackets. Therefore as you register your company, you should ensure that you classify it correctly. If you fail to do so, you might end up overpaying taxes.
You must consult an attorney to determine whether you should classify your business as a Sole Proprietor, Single Member LLC, C Corporation, Limited Liability Company, S Corporation, or Limited Liability Partnership.
2. Keep a Good Record
When running a business, you need to have a sound record-keeping system. When it comes to getting your tax right, you cannot keep your receipts or any other documents in a shoebox. Good record keeping starts with proper filing.
Keep very accurate records so that you can make sure that your tax is correct. It may be a good idea to invest in a user- friendly accounting software. Ensuring that your bank statements, receipts, invoices, and more are well recorded can help you get a significant return.
Tallying all your expenses at the end of the year will also be much quicker with proper record keeping.
3. Have a Plan for Paying Your Taxes
If you have an idea of the general outlook of your business for that tax year, you should start coming up with a plan of paying the taxes. This way, you will prevent cash flow disruptions. You can choose to put some money aside or look for a line of credit.
Know if it would be better to pay quarterly, to distribute the burden throughout the year instead of making one large payment at the end of the tax year. Paying estimated taxes all through the year will help you avoid penalties and interest.
4. Know Your Deductions
You can only take deductions that you qualify for. This is why it is important to know your deduction in that particular tax year to know how much to claim. The basic principle here is that if you have to spend money on anything for you to do business, it may just be deductible.
Find out all the deductibles, whether you are running your business from home or have rented office space.
5. Know If You Qualify for Tax Credit
Though tax deductions are reasonable, tax credits are better because they can give business owners an immediate source of cash and reduce the federal and state tax liabilities. Various companies do qualify for these savings.
To know if your business qualifies, you can hire a good research and development tax credit consulting company and know how much you can save. This is one of the best opportunities that your business has to reduce its tax liability.
6. Get the Right Accountant
The right accountant should be able to do more than just getting your financial statements in order and filing your taxes. They should be able to track your income and expenditure to make sure that you have no cash flow problems.
Hire a good accountant and work with them from the minute you start your business. Also, allow them to monitor your gross and net profits.
7. Claim Income Reported to the IRS
The IRS always gets a copy of the 1099-MISC forms that every business owner receives. They use this to match the income that you have reported against the income that you have received.
You may want to make sure that the income you report to them matches with the 1099 form that you have received. Failing to do this will raise a red flag. Kindly note that, whether or not a client sends out a 1099 form, you should still report that particular income.
8. Maximize on the Larger Deductions
Equipment deductions are enormous. Therefore, if you have bought and used any equipment in your company before the end of the tax year, you can be entitled to a very handsome deduction. Such deductions are intended for small businesses.
These deductions, including possible 100% bonus depreciation for some equipment, apply to used and new equipment.
9. Have a Retirement Savings Plans
Small business owners have various employer-sponsored retirement benefits plans like SEP-IRA, SIMPLE IRA, and 401(k). The difference between these plans is the investment options available, how much is contributed, and more.
Whichever plan you choose, the contribution you make to it can be tax-deductible. You may also get a tax credit to help with the cost of starting up the retirement plans.
9. Beware of Non-Deductible Expenses
According to the new tax laws, some expenses are no longer deductible. For example, you may only deduct 50% of the cost of your meal expenses. Tax reforms also eliminated deductions for expenses related to entertainment.
This means that while your business can deduct half the cost of a business meal, it cannot deduct any cost for treating your clients to a concert or baseball game.
10. Give to Charity
Helping the needy will not only give you and your employees a sense of fulfillment, but it can also provide your business with tax deduction. This deduction can be equal to the value of the property that you have given out.
Know the latest jobs act and tax cuts to know the charitable deductions for local and state taxes.
Consider These Small Business Tax Tips
Taxes can at times be complicated and overwhelming, however, these small business tax tips, will not only help you get taxes right and avoid penalties, but you will also know how to save money and grow your business.
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