As every small-business owner knows, taxes can quickly gobble up a huge chunk of revenue. As such, it’s a good idea to take advantage of deductions and credits to reduce the tax burden. Here are some not-so-obvious tips to help you reduce your tax bill this year.
Understanding deductions and credits
Unbeknownst to most small-business owners, knowing the difference between deductions and credits may save you a lot of money on taxes. Simply put, deductions reduce your taxable income, while credits reduce your tax liability directly.
Let’s say your business raked in $50,000 last year, and you had $5,000 in deductible expenses. In this case, your taxable income would be reduced to $45,000. In other words, you will owe less tax on your income. On the flip side, if you owe Uncle Sam $5,000 in taxes but are eligible for a $1,000 tax credit, you would only owe $4,000 in taxes.
Understanding deductions and credits is important because it can help you save money on your taxes. However, it’s also important to make sure you’re eligible for the deductions and credits you’re claiming and to keep accurate records of your expenses.
Keep accurate records
As a rule of thumb, always keep track of all business expenses, including receipts, invoices, and bank statements. The accurate records will help you identify deductible expenses at tax time and make it easier to file your taxes.
For example, if you purchase a new piece of equipment for your business, you can claim a depreciation deduction for the equipment’s cost over several years. However, you need to keep a record of the equipment’s purchase price, date of purchase, and other relevant information to claim this deduction.
Similarly, if you use your vehicle for business purposes, you can claim a deduction for the business use of the vehicle. To claim this deduction, you need to keep a log of the mileage driven for business purposes, including the date, purpose of the trip, and the starting and ending odometer readings.
Without accurate records, you may miss out on eligible deductions and credits, which can increase your tax liability.
Don’t overlook home office deductions
One of the most commonly overlooked deductions by small business owners is the home office deduction. If you use a portion of your home exclusively for business purposes, you may be eligible to claim a home office deduction on your tax returns.
However, it’s essential to meet the IRS requirements for claiming a home office deduction. For starters, the space must be used exclusively and regularly for business purposes, and it must be your principal place of business or where you meet clients or customers. Additionally, the space must be used solely for business purposes and cannot be used for personal purposes.
To claim a home office deduction, you need to calculate the percentage of your home used for business purposes and multiply it by your total home expenses. For example, if your home office takes up 10% of your home’s square footage, you can deduct 10% of your rent, utilities, and other home expenses.
Hire a professional tax preparer
Navigating the tax code and filing taxes can be a laborious and time-consuming process, especially for small business owners who may not have experience with tax preparation. The solution is to hire a professional tax preparer. A tax preparer does more than just file your returns. They can also provide valuable guidance on tax planning and strategies for reducing your tax liability.
When choosing a tax preparer, you must do your homework and choose a reputable and experienced one. Look for credentials such as a Certified Public Accountant (CPA) or Enrolled Agent (EA) and ask for referrals from other small business owners.
Working with a professional tax preparer can also give you peace of mind and reduce the stress associated with tax season. They can even handle communication with the IRS on your behalf and help you avoid audits or other tax-related issues.
File your taxes on time
As a small-business owner, it’s important to understand the deadlines for filing your tax returns and any applicable extensions. The tax-filing deadline for most businesses is March 15 for S Corporations and April 15 for partnerships and sole proprietorships. However, if you need more time to file your returns, you can request an extension by filing Form 7004.
Failing to file your tax returns on time can result in penalties and interest charges, which can quickly add up and increase your tax liability. Additionally, filing your returns late can delay any refunds or credits that you may be eligible for, which can impact your cash flow.
To ensure that you file your returns on time, it’s essential to keep accurate records throughout the year and stay organized during tax season. Consider using accounting software or working with a professional tax preparer to streamline the process and ensure you meet all IRS requirements.
Running a small business is hard enough. As such, it’s best to get a professional tax preparer to help file your taxes. They will help you take advantage of provisions in the tax code that will give you some reprieve. More importantly, a professional tax preparer will ensure you are not at loggerheads with the IRS.