Tax Tips for Small Businesses in the US

Tax Tips for Small Businesses in the US
Tax Tips for Small Businesses in the US

According to the ‘2015 Small Businesses Accounting Report’ by Wasp Barcode Technologies, 70% of small businesses in the US outsource their tax preparation. However, outsourcing tax preparation will not shift your responsibility for this crucial period. You will still need to prepare financial records and statements, organize accounts receivables and cash flows, and manage the paper work for audits. The following tips will provide guidelines for your business to facilitate the process of accurate tax preparation.

Tips to Make the Tax Season Manageable

  • Avoid Last-Minute Entries:

    Expense receipts must be reviewed and tallied as soon as received. Last-minute data entries can result in serious errors and penalties. A few minutes a day spent on updating the records will help save hours later in the run up to the tax season. You must keep close track of expenses and record them as and when incurred. Notes for each of the expense will help determine why it was incurred. This information will be useful during the audit by the Internal Revenue System (IRS).

  • Keep Records:

    Ensure that you have a physical or digital record of all expenses. If it is difficult to track and identify expenses, allocate a credit card exclusively for business use. This can also help in avoiding mixing business and leisure expenses, which can lead to wrong classification of expenses and the penalties incurred thereby.

  • Avail Extensions on Tax Credits:

    Some tax credits such as the work opportunity tax credit and the new markets tax credit have been extended by the Congress. While the former program is for businesses that hire from groups facing high unemployment, the latter is for opening shop in low-income communities. You can claim 39% of the initial investment as tax credit over a period of 7 years.

  • Be Environment Friendly:

    On purchasing energy-friendly systems, small businesses qualify for business energy investment tax credits (this expires end 2016). With this tax credit, it is possible to save up to 30% on the cost of systems that run on solar, fuel cells, small wind, and Premium Tax Credit (PTC)-eligible technologies or 10% on the cost of geothermal, micro-turbines, and combined heat and power (CHP) systems. Under Section 179D, tax credit can be received for reducing energy usage if the business owns or rents commercial space.

  • Make Use of Deductions:

    You must work with tax experts to make the most of potential exemptions and deductions. For instance, car expenses (when the car is used for business) are deductible. Car expenses are calculated using two different methods. Under the standard method, it is 57.5 cents per business mile plus toll and parking. The other actual expenses method involves adding up all actual automobile expenses such as gas, repairs, oil change, and car insurance and multiplying the sum by the business percentage (total miles for the year). It would be best to try both and see what method gives you a larger deduction. If the business has a home office, start-up costs can be deducted. Also, deduction (maximum is 300 square feet) of $5 per square feet of space used exclusively for business is allowed. There are many deductions that a business might miss through oversight, and so periodically reviewing the current rules and regulations is required.

  • Contribute to Retirement Account:

    Contributions to 401(k) or individual retirement account (IRA) are tax deferrable. This means the business will not pay taxes on the income from the contribution until the contribution is withdrawn. You can withdraw from this fund without penalty after crossing 59.5 years in age. Retirement accounts can significantly reduce the annual tax burden for small businesses. For example, if a business makes $100,000 annually and contributes $15,000 to the retirement fund, it will only be taxed on the balance of $85,000 (excluding other deductions and tax credits). You can contribute a maximum of $17,500 to 401(k) plans and $5,500 to an IRA if you are below 50 years of age. Before putting money into a retirement account, you must check local laws and regulations.

  • File Sales Tax Correctly:

    Nexus laws apply to those businesses that have sufficient physical presence in several states or do business in other states. These laws are often quite complex and the law in each state is different. It is important to review the laws in each new state where business is conducted in order to accurately calculate and file sales tax. Moreover, some states need businesses with large tax liabilities to make electronic payments, while some do not have the infrastructure to support electronic payment. You must know the payment option in each state in which there is nexus.

    For calculating the sales tax, the location where the sale happened is critical. Using rates from the wrong jurisdiction or leaving out any taxes might lead to hassles such as penalties and reconciliation. Determine how often sales tax must be filed. Jurisdictions might send notices for filing, but it is best to keep track of your tax liabilities.  Failing to respond to notices on time can result in a levy to the business bank account or even suspension of the business license.

  • Get Help with Accounting:

    Maintaining accurate data and doing your own taxes and accounting tasks can be difficult and time consuming. You could consider either using accounting software or outsourcing to expert accountants. Good accounting software will help track expenses and payroll. Outsourcing the accounting process, however, will save time and effort, especially regarding data entry. Accounting service providers keep track of changes in rules and regulations, and can advise you on deductions you can claim, helping you do your taxes right and on time.

Small businesses are part of the agenda for Presidential candidates, and this could transpire into some changes coming into effect in 2016. To make the most of any beneficial developments, business owners must focus their energies on core activities, and ensure they are not hampered by mandatory but non-core tasks such as tax preparation.

Also Read Related Articles:

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1 6 Reasons Businesses Must Outsource Finance and Accounting
2 5 Ways to Determine the Financial Position of Your Business
3 Importance of Financial Planning for Organizations

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Last Updated on August 20, 2020


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