How to maximize your small business tax returns today
For many small to mid-size business owners, tax time offers its own set of special challenges. You want to pay your fair share of taxes, but you'd like to hold onto every last dollar that you can under the law.
Unless you're an expert on the tax code or can afford to hire a high-price tax attorney or accountant, you should do a little research to keep from paying Uncle Sam more than is necessary.
Just as it's important to keep close tabs on every dollar you spend to operate your business, it's equally important to make sure you don't throw away your hard-earned money by overpaying on your income taxes.
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Here are a few suggestions that may help you to trim your business's tax bill while still staying on the right side of the law:
Consider filing as S Corp
Small businesses have the option of filing as a C Corp or an S Corp. This decision in no way affects the makeup of your business and only governs the way in which you file your taxes.
As an S Corp, your business is taxed as a sole proprietorship or partnership, and you can pass through your company's profits or losses on the personal income tax returns of its shareholders, which may very well be you alone if you are the business's sole shareholder.
Filing as an S Corp allows your business to retain all the privileges -- and responsibilities -- of a C Corp while saving time and money by going the S Corp route. The big advantage of an S Corp filing is avoiding double taxation, according to an article in "Entrepreneur" by Nellie Akalp. If you are a shareholder in a business that files as a C Corp, the government levies taxes on the company's profits, as reported on the company's tax return. If the company then distributes a portion of its profits to shareholders, the government gets a second whack at those funds when you report them on your personal tax return.
If you opt to file your business's taxes as an S Corp, each shareholder (if more than one) reports his percentage share of the business's profits or losses on his personal tax return. There is no requirement for a separate filing of the business's income as a separate and distinct entity.
Stay abreast of tax law changes
Every New Year brings a number of changes in the tax laws that affect small business, as well as individuals and large corporations.
Some of these changes may give taxpayers a break, while others close loopholes and result in a higher tax bill. No matter how they affect the bottom line, it's your responsibility as a small business owner to stay on top of these changes.
One such change that goes into effect with your business's tax returns for 2013 is a significantly simplified option for claiming the home office deduction, which previously required complex computations daunting enough to discourage taxpayers from claiming the deduction at all.
Effective with your 2013 return, you can calculate your home office deduction by multiplying the total square footage of your office by $5. If you have set aside home office space totaling 120 square feet, you can deduct $600. The maximum annual deduction allowable under this formula is $1,500.
To ensure that your business is paying no more than its fair share of taxes, it's critical that you don't let any tax deductions slip by.
Here are just a few of the tax deductions that many businesses overlook, resulting in a higher tax bill than they should be paying:
- Interest: If your business takes out a loan to expand its operations or purchase new equipment, all of the interest and carrying charges associated with that loan are deductible.
- Bad Debts: If your best efforts to collect on your business's past-due accounts have failed, some of those bad debts may be deductible depending on the nature of your business and the specific debts. If a customer has failed to pay you for goods you sold, you can deduct that amount on your taxes. However, if you're in a service business and have been stiffed by a client, you cannot deduct for the time you spent providing the service.
- Auto Expenses: If your business has its own vehicle or you have used your personal vehicle to conduct company business, the expenses incurred can be deducted. If you have kept careful records of the exact expenses incurred while the vehicle was being used for business, you can deduct that amount on your taxes. Alternatively, you can use the standard mileage rate method, which is calculated based on the number of miles the vehicle was used for business. For tax year 2013, the standard mileage rate is 56.5 cents per mile.
Business Entertainment: If you entertain existing or prospective customers, Nolo.com says you're entitled to deduct 50 percent of the actual cost if:
- The occasion is directly related to business and if business was discussed at the event.
- The occasion is closely associated with the business and the entertainment involved takes place directly before or after a business discussion.
- Travel Expenses: If must travel in the pursuit of business, most of the expenses involved can be deducted on your taxes. Typically, such expenses include auto expenses, air fares, cab fares, lodging, meals, dry cleaning and laundry expenses, telephone calls, and tips.
- Advertising and Promotion: Your business can deduct the expenses incurred in reaching out to potential customers through advertising campaigns or special promotions. Nolo.com says that this would include promotional expenses incurred as part of a campaign to generate goodwill for the business, citing as an example sponsorship of a peewee football team. To ensure that such costs are deductible, your company must establish a clear connection between your business and its sponsorship of the team. This might be done by including your company name in programs for team games or lending your business name to the team itself.
Admittedly, these suggestions only scratch the surface of steps you can take to ensure you're paying the absolute minimum in income taxes.
Hopefully, however, this very discussion will inspire you to do further research on your own to find other ways in which to trim your business's tax bill.
About the author
Don Amerman is a freelance author who writes extensively about a wide array of business and personal finance topics.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.