Minimizing taxes may be the difference between a profitable business and one that is just scraping by. Here are seven ways you can lower the stress of small business taxes and hopefully put more money back in your pockets.
1. Tax Software Is Your Friend
Using tax software is a must for small business owners it will make preparing and filing your taxes online much easier. Ditch the paper. The IRS has reported less than 1% of online tax returns have errors. That number skyrockets to 21% when you file using paper returns. If this sounds like too much work, hire a tax professional, and maybe a bookkeeper. Even with the best CPA, if you don’t have the right info about your expenses, you will pay more in taxes. All those small, missed deductions can really add up.
2. Follow Your Spending To Track Deductions
Keeping track of your spending is easier than ever these days but it can still seem daunting to some. With the use of softwares like Quickbooks, you will have one more opportunity to catch all deductible expenses. Whatever you do don’t drag shoe boxes full of receipts to your Tax Preparer or CPA. Take it from me any reputable Tax Preparer or CPA worth a darn will charge you extra for going through all those receipts. At $150+ per hour, you could be looking at a hefty added expense. On top of missed deductions.
3. Pay Your Retirement Accounts First
No one has more retirement planning options than those who are self-employed and small business owners. For those who fit into one or both of these categories, you still have access to a Traditional IRA like everyone else, capping at $5,500 per year. This type of IRA can also be combined with retirement plans like a 401(K) or SEP IRA thereby allowing you to contribute up to $55,000 per year. Contribution limits are even higher for those of you over 50. Stack a 401(K) with a Cash Balance Pension Plan and you may be able to put away closer to $150,000 per year .When you are income-wise you can lower your tax bill. Contributions to the above-mentioned plans will get you a tax deduction. This can be huge for businesses that are trying to keep the new pass-through entity tax break. Making contributions to retirement accounts will reduce your taxable income, and maybe get you back below these income thresholds thereby qualifying your business for the new 20% pass-through tax break. Double Win!
Talk to your financial planner and CPA to help narrow down which plan will allow your business to contribute the most. These moves payoff now with tax breaks, and payoff later by helping you create a secure retirement.
4. Deduct Your Home Office
Too many people who work from home are afraid of taking the home office deduction. I cover this topic in depth here. If you work from home at least look at if you qualify for this tax deduction. You may be surprised by how much money you can save.
5. Stop Ignoring Your Auto Expenses
The IRS provides two ways to calculate this deduction. First, track your actual expenses. Then deduct the percentage of usage that is tied to your business. Second, track your actual mileage and take a tax deduction for those miles. Keep in mind that the rate is 54.5 per mile for 2018.
Yes, tracking all of this stuff will take a little time. But how much time would you need to work to earn the comparable tax savings? I’m guessing more time that it will take to track your mileage. There are even apps now to help you do it.
6. Employ Family Members
My husband is my director of operations at my financial planning firm. This allows us to nearly double the money we can contribute to our retirement accounts (tip 3). This happens to be his full-time job but it doesn’t have to be in your case. Does your spouse help with paperwork or bookkeeping? Consider paying him or her for time spent. It could help your spouse understand more about the business and be more supportive of all your hard work. It may also have some additional tax benefits in certain cases. Many business owner parents have also been known to hire their children. It can be a great opportunity to teach them the value of a dollar. Typically, children will be in a lower tax bracket, so paying them for work may help reduce the overall tax burden for the family.
If your child put away $5500 for just 3 years from 15 to 17 into a ROTH IRA. Never contributed again and earned 10% per year until 70 how much would you have? Contributing just $16500 would turn into a whopping $2.5 million dollars.
7. Track Your Carryover Tax Deductions
For those of you whose eyes just glazed over, I’m talking about deductions for things like capital losses, net operating losses, home office deduction or even large charitable donations. These are a few deductions or credits, that when not fully used in one year, may be carried forward to a future year.
Small business ownership is hard enough without having to stress about all this tax filing stuff. Do yourself a favor and break up the accounting throughout year and let software do most of the heavy lifting. Before you know it, tax season will be a breeze and you will have forgotten why it always used to stress you out. Hopefully a lower tax bill will come your way as well.
With so much technology at our fingertips it’s easy to keep track put remember the faster you start planning for tomorrow the easier today will get.
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