For many successful small businesses, every penny counts. In fact, finding savvy, smart ways to save money means having more money to invest, more money to grow, and more money to take risks. And while it can be important to cut corners on your expenses and day-to-day operations, it’s also important to make sure you aren’t overpaying on your taxes. Of course, that’s easier said than done. After all, it’s not always easy to navigate the tax code. Here are commons places where your small businesses may be overpaying on its taxes.
You chose the wrong business entity
Many small business owners choose to structure their business as a limited liability company or as a corporation in order to limit their personal liability. For example, after carefully considering my options and the nature of my business, I structured my own business as a limited liability company because of the flexibility it offers. Of course, what is right for my business may not be right for you. After all, these two main business structures each have their own unique legal, tax, and financial implications.
For example, regular corporations (a.k.a. “C Corporations”) and their shareholders are subject to a double tax. As the IRS explains: “The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends.” Meanwhile, LLC owners have the option to be treated as a disregarded entity (like an “S Corporation”) which means that the LLC’s profits can be passed through to its owners to be treated like regular income. In other words, this allows an LLC’s owners to avoid the double taxation issue because the LLC’s profits pass directly to the owners’ tax returns. In fact, LLCs can opt to be taxed like an S Corporation whether they are owned by a single member or multiple members.
Remember, though: there are many reasons to choose a business entity. And what’s right for one business isn’t necessarily right for another. You should consult with your lawyer and/or tax professional if you have questions as to which entity type is right for your business.
You don’t track your business expenses
One way to save at tax time is to keep track of all legitimate expenses that you incur throughout the year so that you can deduct those expenses from your tax burden. Again, this is sometimes easier said than done. After all, there is no master list of “legitimate expenses” because what constitutes a legitimate expense will vary from business to business.
The Internal Revenue Code states that a valid write-off is any expense incurred in the production or collection of income. As a result, one good strategy is to save and organize receipts for all potentially legitimate expenses so that at the end of the year you can review them with your CPA. After all, maximizing your legitimate deductions means minimizing the total tax liability of your business. Put another way, by capturing all of your legitimate tax write offs you pay less total taxes at the end of the year.
Although it’s to your benefit to keep track of your expenses throughout the year, you don’t want it to take time away from other important to-dos for your business. Here are five effortless accounting apps that can help you capture your expenses and deductions, without a lot of extra work on your part.
You miss out on small business tax credits and incentives
The government provides a slew of tax credits and incentives to encourage small business growth and development. Although many of these credits and incentives had been scheduled to expire, nearly all of them have been extended for 2013. For example, Section 179 of the Internal Revenue Code allows most small businesses to deduct the full purchase price of certain types of expenses, such as equipment and software, the same year they purchase the expense instead of having to deduct the depreciation value a little at a time over a number of years. Similarly, the Research and Experimentation Tax Credit allows small businesses engaged in certain types of research and development to deduct those costs from their gross income. The Work Opportunity Tax Credit is available for employers who hire individuals from groups facing high rates of unemployment, such as veterans, youths and various disadvantaged communities.
As many as 43 states also offer state-specific tax credits to small businesses that meet certain requirements. Speaking with a tax professional can help you identify each of the credits available to your business.
You pay late
It’s not uncommon for new business owners to presume that their taxes are due on April 15th. After all, that is when you’re used to paying. Unfortunately, it’s more complicated than that for small businesses. If you are self-employed, then you are required to pay self-employment tax (a Social Security and Medicare tax) which is due quarterly. Not only that, you are required to pay estimated taxes quarterly as well. If you fail to make your quarterly estimated taxes and self-employment taxes, you may be targeted for an audit and subject to penalties and interest charges when you finally do pay up. Simply put, paying on time may mean paying less.
You don’t have a tax adviser
Small business taxes, deductions, and credits are hardly straightforward. It’s often not clear whether or not your business is entitled to a credit or deduction. As a result, the best way to ensure that you aren’t overpaying on your taxes is to enlist the help of a professional tax adviser. In most instances, the savings you’ll capture with their assistance more than makes up for the cost of their services.
With proper diligence you can limit the total tax liability of your business. That means you’ll have more money to invest in growing and maintaining your business.
Do you have any specific tips to help other businesses with their tax liability? Let us know what’s worked for you in the comments section.