Tax Tips for Small Businesses
1. Increasing your expenses and decreasing your revenue. It may seem obvious but this is a principle that can always be relied on to reduce your tax burden. Make business purchases that you were planning for next year this year. Deducting them from your revenue this year will reduce your total income.
Selling off your bad investments at a loss, allows you to offset your investment gains on the year up to $3,000. This is called tax-loss harvesting and many of the robo-advisors (Wealthfront, Betterment, etc) offer this as a perk of their platforms.
If you have any services and goods that have been ordered but not yet delivered in the current year, defer recognizing revenue until they are delivered (hopefully in the next tax year). This will decrease your business’ revenue and taxable income on this year’s filing.
2. Deducting home office expense. If you use part of your home solely for business purposes, you may be able to deduct expenses for that portion. The deduction is available for both homeowners and renters as long as (i) that part of your home is regularly and exclusively used for business; and (ii) it is your principal place of business.
There are two methods of calculating the home office deduction. The Simplified Option applies a standard deduction of $5 per square foot of home space used for business, up to a maximum of 300 square feet. The Regular Method requires you to determine the actual expenses of your home office including mortgage interest or rent, insurance, utilities, repairs, and depreciation. Multiply those expenses by the percentage of your home space you use for business.
3. Maximizing mileage, travel and auto expenses. The IRS allows you to deduct 54 cents per mile (down from 57.5 cents in 2015) for business travel as well as parking and toll expenses. Note that the IRS excludes driving to and from the office as an eligible expense.
4. Company benefits and charitable deductions. Contributions to retirement, flexible spending, and health saving accounts in addition to charitable contributions can all be eligible deductions.
5. Eco credits and deductions. Buying environmentally friendly equipment (e.g. dishwashers, clothes washers, and refrigerators) could grant you tax credits. Also purchasing a full electric vehicle or hybrid may allow you to take advantage of the IRS Plug-In Electric Drive Vehicle Credit, though make sure to check if your vehicle still qualifies.
6. Small Business Health Care Tax Credit. If you’re a small business employer you’re eligible for this credit if you (i) have fewer than 25 full-time equivalent employees, (ii) pay an average wage of less than $50,000 a year, and (iii) pay at least half of your employee’s health insurance premiums. To be eligible, you must also have purchased coverage through the small business health options program, also known as the SHOP marketplace. If you qualify, use Form 8941 to calculate your deduction.
7. Deducting qualified equipment and software. Section 179 and bonus depreciation have both been extended for 2016. Section 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased (up to $500,000) rather than depreciating it over the life of the asset. Bonus depreciation allows business owners to depreciate 50% of the cost of new equipment purchased in 2015. You can even use the two tax incentives together!
Bought stuff for your business last year? Deduct it up to $500,000.
8. Understanding the Affordable Care Act (ACA). With the ACA, small businesses now can face penalties for failing to provide health insurance to employees or reporting to the IRS what type of employee coverage they provide. In 2016, the ACA mandates that businesses with 51 to 99 employees are required to offer health insurance to at least 70% of their full-time equivalent employees or face a penalty of $2,000 per employee.
The ACA also mandates new reporting requirements. Employers are now required to report, on each employee’s W-2 form (in Box 12), the cost of the health coverage the employer provided. Penalties for not reporting include fines of $200 per employee.
9. Claim your full write-offs. Tax rules change every year, so don’t assume that deductions or rules from previous years automatically apply to the most recent. Failing to learn what’s new in the tax code could result in you and your business leaving money on the table. Make sure you have a good accountant who thoroughly understands the updated tax code. As a reminder, if you’re self-employed, you’re able to deduct one-half of your self-employment tax. Although it’s considered a personal income deduction, you don’t need to itemize to claim it.
10. File an extension if you need to. The filing deadline for 2016 returns is March 15 for calendar-year corporations, and April 15, for individuals, partnerships, and LLCs.
If you you’re not able to complete your return for any reason, you’re able to request a filing extension. Partnerships, LLCs, and corporations should use Form 7004.
The extended due date for S corporations, partnerships, and LLCs is September 15, 2016. For individuals and C corporations the extended due date is October 17, 2016.
Remember to work closely with an experienced accountant as well as checking the tax code yourself before filing your business taxes. Best of luck and we hope you get the most out of this year’s filing!
According to the 2015 Small Business Accounting Report the biggest accounting issues facing small businesses today are accounts receivable / collections and cash flow. If you’d like to learn more about solving AR and cash flow issues, schedule a complimentary consultation with Harper today and find out why so many small businesses choose to work with us.
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