As a small business owner, you know that every penny counts come tax season. To complicate things further, you’re dealing with changes to tax laws yearly. Although these tax reforms may only impact small businesses minimally, it’s important to be aware of any new tax law reforms and how, or if, they apply to your business.
For a small business, maximizing deductions and lowering your tax bill can be the difference between a profitable year and another year of scraping by. So, understanding where you can take additional deductions can save you major dollars and headaches. It’s imperative to speak with a tax professional for specific tax knowledge, but in the meantime, these tax season tips can help you get a head start.
1. Maximize Your Deductions
This one might seem obvious, but there are many deductions you can take. Some of them are specific to you as an individual, your employees, or your industry. For example, if you utilize an area of your home for business — whether it’s to work or for storage — you can deduct a part of your rent or mortgage for your home office. And that’s not all.
There are a variety of deductions you can take even if you’re using your personal belongings for a dual purpose, such as your home or car. Getting a full understanding of what deductions are available could open up new year-over-year savings for your business.
2. Pay for Your Retirement Now
The downside of being self-employed is that you are the only one contributing to your retirement. The upside is the tax deduction you can take just because you contributed. If you’re not already utilizing a retirement plan, make it a priority for next year.
Small business owners under 50 can contribute up to $6,000 per taxpayer to a Roth IRA (Individual Retirement Account); those over 50 can put up to $7,000 toward their retirement savings.
3. Track Your “Carryforward” Deductions and Credits
When it comes to tax deductions (i.e. capital or net operating losses, home office deductions, etc) and tax credits (i.e. charitable donations, energy efficiency, etc), be sure to track all of them. With tax code, the money isn’t always a “use it or lose it” situation — sometimes that money can be carried over to the following years, known as “carryforward.”
To take advantage of this tax law you must make a note of any deductions and credits you couldn’t fully use in one year.
Pro Tip: You should be keeping tabs throughout the year, so you aren’t struggling to remember everything come tax filing season.
4. Use Tax Software or an Accountant
The benefits of using tax software may seem obvious, yet many small businesses still choose to file a paper return from fear of an audit. However, the IRS once reported that less than 1% of online tax returns have errors, while 21% of paper returns have errors. The lesson? It’s time to nix the paper.
If you don’t have a firm understanding of business finance, it may be better to hire an accountant. In which case, you’ll want to make sure you have these important items finalized to hand over:
- A financial statement
- Capital-asset activity
- Personal vehicle-use for business
- Home-office expenses
ProTip: TurboTax is a tax filing software that also incorporates advice and reviews from real Certified Public Accountants (CPAs) or Enrolled Agents (EAs).
Tax season can be stressful, but by preparing ahead of time — you can minimize those overwhelming feelings! Using these tips this year, and every year after, can not only save you money but also help you feel more confident when filing.
Of course, every tax situation is unique. When in doubt, make sure to talk to a professional who can help navigate the laws.