What could be better than owning a small business? You get to make important business decisions, but without the pressure of running a gigantic behemoth corporation. You get to lead a few employees with benevolence and wisdom. You get to panic come tax time when you realize that what the government is asking for is more than you planned -- and you're the one in charge of figuring out how to make it work.
So perhaps it's not all fun and games. But in the next few pages, we'll explore some tips to make your small business feel a little more substantial during tax season. From tax breaks to organizational tips, there's no reason to dread April -- we've got you covered!
10: Get a Good Accounting System
Want to avoid taxes altogether? If you're looking for a surefire way to turn your small business into a failed business, be sure to ignore the basics of accounting and bookkeeping. With your business run into the ground, your taxes will be a cinch. (Well, next year maybe.)
In all seriousness, there's no simpler way to start off on the right tax foot than to simply keep track of what you're making and spending. Because small business are able to itemize a lot of expenses, it's also very wise to make sure that you have records and receipts for any of the costs you'd like to write off. That doesn't mean jamming flimsy pieces of register tape into your junk drawer; scan and digitally file your expenses. If the IRS audit team comes knocking, you'll be able to show them an organized, legitimate paper trail.
9: Capital Expenses
Obviously, you're not allowed to ask the government to pay you back for the normal costs of operating a business. Sure, you can deduct some of the expenses you have, but clearly you gotta wait until you're actually running the business.
Or do you? Turns out that the first year you start up your business, you can actually deduct $5,000 in capital expenses. ("Capital," in this case, basically means they're not current expenses.) That sound broad? It kind of is. Basically, any cost you incur while creating or investigating a business might count. If you paid for advertising, market surveys -- even wages for employees -- before the launch of your business, you can take that $5,000. Any amount over $5,000 might be deductible as well, but you'll have to amortize it over the course of several years [source: IRS].
8: Hire Your Kids
We're not talking about forcing adolescents into factories here. We're actually just suggesting you to add some economic stimulus to your own household by hiring your own children. Nope, it's not just because it seems like a nice thing to do; it really can help ease the tax burden on a small business.
Here's the thing: You have to give them a reasonable wage, but you don't have to pay Social Security or federal unemployment tax if they're under a certain age. (Keep wages low enough, and they don't have to file income taxes in general.) You can even say that their wages are, say, just enough to cover that phone bill you pay for them every month. They get to work to pay off the phone bill, and you're not taxed on it as ordinary income. Keep in mind, however, that you have to run a sole proprietorship -- or a partnership with your spouse -- in order for this to work.
7: Hire Your Spouse
Here's another way to keep business in the family. Perhaps being a small business owner is a nice way to become closer to your husband -- by giving him a job. It's not just kind of you, or a way to make sure you both get the same time off during the holidays. Hiring a spouse can actually work extremely well in your tax favor if you're willing to offer your loved one a few perks.
That doesn't mean a corner office and morning doughnuts. (The day buying doughnuts becomes a tax write-off is the day I quit doing any work besides buying doughnuts.) It's actually the opposite of doughnuts that's going to help you save some money: If you hire your spouse and offer him or her health insurance, you can deduct those payments on your taxes. Which sounds great -- being able to write off your spouse's health insurance seems nice -- but what's the big deal? Well, consider that a health insurance plan can include not only the employee, but the employee's family. Suddenly, you're able to write off your spouse's insurance, your insurance and your kids' insurance [source: TIME].
6: Affordable Care Act Credit
When the Affordable Care Act was introduced, there was a lot of talk about how it would affect small business owners and their bottom line. Nobody wanted to bleed small business owners dry, so tax credits were introduced in the bill to relieve the cost of healthcare.
In 2014, a small business owner can qualify for a 50-percent deduction if the business employs fewer than 25 employees with average annual wages of less than $50,000 and contributes at least 50 percent to employees' self-only health premiums. You do need to make sure your employees are purchasing insurance in the Small Business Health Options Program Marketplace, but it's a huge credit for any business that qualifies.
More Tax Tips for Small Businesses
5: Section 179
Section 179 is a rock star deduction. Not that you can actually deduct the cost of leather pants and sunglasses, but this is just the kind of deduction that small business owners scream for. To understand why it's cool, you should understand how most expense deductions work -- very slowly. A lot of expenses are subject to depreciation, meaning that you can only write off their cost over a certain number of years. So sure, you can deduct the full price of that laser printer, but only over the course of its five-year life-span -- which is all fine and good if you're looking to lower your taxes a little every year.
But what if you want to deduct the full price that year? Section 179 lets you. Well, it lets you deduct up to $25,000, provided the equipment you're expensing meets the requirements. Off-the-shelf computer software counts; land doesn't. There are a lot of exceptions and rules for the Section 179 deduction, so do read up on it to discover if there are loads of deductions you can write off all at once.
4: Charitable Stock Donation
You're a good person, right? That's probably why your small business donates to charity. You want to help the kids, the animals or the Earth. So you hand over a check, and then you giddily deduct the amount from your taxes. (You want to help the kids, the animals and the Earth, but you also want to help yourself out. No shame in that.)
Consider going about it a different way. Instead of giving away a check or cash, you might want to think about donating stock. While it may seem pretty fancy for a small business owner, it's a smart idea. You can deduct the current worth of the stock on your taxes rather than what you paid for it. Does that actually work out to be a good deal? It absolutely could be, if you plan it right. Say you bought stock a year ago for $250. You donate a share of that stock to a charity. By tax time, the share has doubled -- and you can write that doubled value on your tax return.
3: Small Business Jobs Act Credits
In 2010, President Obama signed the Small Business Jobs Act into law. The act provided a whole slew of benefits for small businesses, like providing more money for small business loans and incentives for exporters [source: Lamoreaux]. It also introduced some new tax cuts for small business owners.
The cuts run the gamut, and it's wise to look through the list to make sure you're taking advantage of every program you can. For instance, certain small business investments are subject to zero capital gains taxes. Self-employed people can deduct health insurance costs. Even something as simple as the fact that cell phones -- formerly seen as "listed property" and deductible with certain recordkeeping -- are now much easier to write off for small businesses. Even relief from a penalty for tax errors is included in the act: It's based on a percentage of taxes now, not a flat dollar amount [source: Lee].
2: Home Office Deduction
The home office deduction is a little controversial. Not because anyone doubts that it's amazing: No one can argue that writing off a part of your home's Internet bill or heating feels like you're getting away with a tax crime. But there's a persistent rumor that deducting a home office is akin to writing "Audit, Please" on top of your return -- and then adding neon yellow highlighter to the heading for good measure.
Here's the thing: If you do qualify for the home office deduction, take it. It's unlikely that it leaves you any more vulnerable to an audit, and loads of people don't write off home office spaces even if they have them [source: Eisenberg]. But do know that the requirements are strict, and you certainly aren't doing yourself any auditing favors if you make false claims.
The key is that you must use the office space for regular and exclusive business use. (That means no trying to write off the family den, where the kids play computer games and you occasionally check your work email.) However, there are lots of intriguing exceptions for things like storing inventory or meeting clients, so check out the rules and see if you might find one more deduction for your small business.
1: Be Vigilant About Employees and Vendors
The IRS defines "vendor" pretty broadly; it's basically any person you pay for rent, services or even prizes and awards. The list also includes materials and equipment, so long as you paid an individual or partnership. Here's something the IRS is super strict about: If you're paying these vendors over $600 throughout the course of the year, you're going to have to send in a 1099 form. It might be prudent to collect a W-9 from all the vendors you work with -- regardless of how much you're anticipating paying them -- just so you have their mailing information and tax IDs [source: Kohler]. You're subject to penalties if you don't send the 1099 -- and you can be dinged even if you're a little late.
It's also important that you don't attempt to classify employees as independent contractors. Trying to avoid payroll taxes or withholding is not going to endear you in the eyes of the IRS. Check out the IRS for some simple ways to determine if you need to start identifying your workforce as employees [source: IRS].
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.
Author's Note: 10 Tax Tips for Small Businesses
Perhaps we made the home office deduction sound a bit daunting, but do know that even the IRS is trying to make it easier for folks to claim. Instead of making you figure out a percentage of your expenses to deduct based on the space you use in your home, the IRS now offers the "simplified" home office deduction: Simply multiply the square footage of your office (up to 350 feet [107 meters]) by $5, and then deduct that dollar amount.
- Dratch, Dana. "A Dozen Deductions for Your Small Business." Bankrate. March 14, 2014. (Oct. 10, 2014) http://www.bankrate.com/finance/money-guides/a-dozen-deductions-for-your-small-business-1.aspx
- Eisenberg, Richard. "Secrets of Claiming a Home-Office Deduction." Forbes. February 8, 2013. (Oct. 10, 2014) http://www.forbes.com/sites/nextavenue/2013/02/08/secrets-of-claiming-a-home-office-deduction/
- Fishman, Stephen. "Top Tax Deductions for Your Small Business." Nolo. 2014. (Oct. 10, 2014) http://www.nolo.com/legal-encyclopedia/top-tax-deductions-small-business-30176.html
- Goings, Calvin W. "Small Business Tax Tips." United States Small Business Administration. (Oct. 10, 2014) http://www.sba.gov/offices/regional/x/resources/399921
- IRS. "Employee vs. Independent Contractor -- Seven Tips for Business Owners." Aug. 19, 2010. (Oct. 10, 2014) http://www.irs.gov/uac/Employee-vs.-Independent-Contractor-%E2%80%93-Seven-Tips-for-Business-Owners
- IRS. "Publication 535." 2013. (Oct. 10, 2014) http://www.irs.gov/publications/p535/ch07.html
- Kohler, Mark J. "Time to Send Out 1099s." Entrepreneur. Jan. 17, 2014. (Oct. 10, 2014) http://www.entrepreneur.com/article/230851
- Lamoreaux, Matthew G. and Alistair M. Nevius. "Highlights of the Small Business Stimulus Act." December 2010. (Oct. 10, 2014) http://www.journalofaccountancy.com/Issues/2010/Dec/20103436.htm
- Lee, Bonnie. "Tax Breaks Every Small Business Needs to Know About." Fox Business. June 24, 2014. (Oct. 10, 2014) http://smallbusiness.foxbusiness.com/finance-accounting/2013/06/24/tax-breaks-every-small-business-needs-to-know-about/
- Lee, Jesse. "President Obama Signs Small Business Jobs Act - Learn What's in It." WhiteHouse.gov Sept. 27, 2010. (Oct. 10, 2014) http://www.whitehouse.gov/blog/2010/09/27/president-obama-signs-small-business-jobs-act-learn-whats-it
- TIME. "10 Tax Tips for Small Businesses." March 13, 2013. (Oct. 10, 2014) http://business.time.com/2013/03/13/10-tax-tips-for-small-businesses/
- TurboTax. "Little-Known Tax Tips for Small-Business Owners." Intuit. 2013. (Oct. 10, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/Little-Known-Tax-Tips-For-Small-Business-Owners/INF26191.html
- TurboTax. "Tax Aspects of Home Ownership." Intuit. 2013. (Oct. 10, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Tax-Aspects-of-Home-Ownership--Selling-a-Home/INF12035.html