As a business owner, you face a host of challenges every day. You need to ensure your marketing strategy is helping you achieve your key business objectives, find creative ways to attract new customers and retain those you already have, monitor what your competitors are doing, and keep your employees happy and engaged. Above you, you need to make sure your business is growing and that your financial situation is sound.
Oh, and there's more thing: you need to pay attention to your taxes. According to Small Business Trends, paying federal taxes is one of the top 10 challenges small business owners face, and with good reason. You need to ensure that you're in compliance with continually changing tax laws, and you need to make sure you're taking advantage of every legitimate deduction to which you're entitled.
The Stakes Couldn't Be Higher
Making sure you don't pay more in federal taxes than you need to is one of the many smart financial decisions that can keep your business healthy and thriving, and the stakes couldn't be higher. According to are recent report from Gallup, 2014 represented a watershed for small businesses. That was the first year in decades when more small businesses failed (470,000) than were launched (400,000).
Staying on Top of Changing Federal Tax Laws is Essential
Tax laws can be difficult to understand, but it's essential that you know what those laws are, and how they change. If there's a new business deduction and you don't take advantage of it, for example, that's the same as throwing money away.
Odds are you already know about some of the more common deductions, like salaries, mortgage interest, repairs, insurance, supplies and depreciation on property, but you might not know about some other substantial deductions, including the following 4:
1. The Home Office Deduction
Many business owners who operate out of their homes are reticent to take the home office deduction, fearing that it might trigger an audit. According to Turbo Tax, however, if you qualify for this deduction and follow the rules honestly, there's actually little reason to worry.
To qualify, you need to use a room in your house as your primary place of business (the place where you work with your customers or clients). You need to use this space in your home exclusively for conducting business (meaning it can't double as your living room or family room).
The simple way to calculate the home office deduction is to multiple $5 times each square foot (to a maximum of 300 square feet or $1,500). Alternately, you can calculate the percentage of total square footage of your house that your work-space constitutes, and multiply that percentage times the cost for utilities, repairs and insurance (these are indirect expenses). You should add to this direct expenses associated with only your work-space.
2. Startup Costs
Startup businesses face special challenges maintaining sufficient cash flow and gaining traction. If you have a startup business, the IRS will let you deduct up to $5,000 of the costs you incurred prior to the launch of your new business. For costs over $5,000, you can amortize as much as $50,000 over a period of 15 years. This includes expenses for things like travel, advertising, transportation, worker training, consultant fees, legal costs and accounting fees.
If you have a small business (which is defined as one with makes no more than $10 million a year in gross revenues), you are permitted to define inventory as "materials and supplies" (rather than goods sold) and deduct their cost. If in the past you've included inventory as part of the cost of goods sold, you'll need to use IRS Form 3115 and file for a change in accounting method to take advantage of this deduction.
The "Protecting Americans from Tax Hikes (PATH) Act" allows business owners to deduct as much as $500,000 for equipment purchases of less than $2 million. You're permitted to take the entire deduction in the first year, provided the equipment on which you're taking the deduction began to be used in that same year.
Under the bonus depreciation deduction, you can deduct as much as 50% of your new capital equipment costs for the year that equipment is purchased. (This deduction will drop to 40% for 2018 and to 30% in 2019.)
These are some of the more substantial deductions you can take to retain more of the money you make in your business. There are, however, many others which are not as large, but which you nevertheless need to be aware of. These include deductions for things like the cost of tax preparation, bad debts, bank fees, carryovers (for deductions you didn't use in prior years), health insurance premiums, interest payments, and self-employment taxes.
Obviously, federal tax laws are complex and continually changing, which is one of the reasons you need to get sound advice to ensure you don't pay more in taxes than you're required to. To learn more about the ways our income tax preparation, outsourced accounting, business analysis, budgeting/forecasting and financial reporting services can help you make your business more profitable, schedule an appointment with us today.