As you settle down after the busy holiday season, you will soon face another season – tax season! Small business owners need to understand how taxes may affect their business.
It is important to file properly, avoid audits and claim the right tax deductions, so here are six tips to help ease the burden of tax preparation and help you get ready for the April 15 deadline.
1. Keep Good Records: Proper record-keeping year-round is the first step to ensuring your taxes are filed accurately and that you have the paperwork you need to back up your deduction claims just in case you’re audited.
2. Understand Your Deductions: What small business deductions can you take? Do you have the documentation and original receipts to back them up? Remember, tax credits and deductions change each year.
3. Utilize the Small Business Jobs Act Tax Provisions: The Small Business Jobs Act of 2010 President Obama signed into law has more than 17 tax provisions to decrease the tax burden for small businesses. Several of the law’s provisions may be taken advantage of during this year’s tax season to provide great savings for your business.
4. Remember the tax credits in the Affordable Care Act: These tax credits will allow small businesses to cover up to 35 percent of the premiums a small business pays to cover its workers. In 2014, the rate will increase to 50 percent.
5. Avoid Common Audit Traps: It is very important to be aware of potential red flags and act on them before the IRS does.
• Classifying Employees as Independent Contractors – Independent contractors and employees are not the same and it’s important to understand the difference. To the IRS, misclassification can be seen as an attempt to avoid payroll taxes and non-compliance can bring penalties and back taxes.
• Home Office Deduction – This deduction is very specific and not all home-based businesses qualify. Likewise, if you run your business from a commercial location and claim the home office deduction, you might trigger some interest from the IRS. Know how to determine if you are eligible to claim it and what specific expenses you can write off.
• Large Sum Miscellaneous Deductions – If you claim a large amount of itemized deductions relative to your income, the IRS may get suspicious. Likewise, if you bucket a large amount of miscellaneous expenses, you may raise eyebrows. Be specific and label every deduction.
6. Keep Business and Personal Expenses Separate – The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle for personal use. Be diligent about keeping good records and maintain separate bank and credit card accounts for your business.
For additional information on these tax tips and current year tax deductions visit the SBA Small Business Tax Guide or contact the IRS at www.irs.gov. I also invite you to follow us on our regional Twitter #sbamidatlantic and Facebook www.facebook.com/SBAMidAtlantic.