Being an entrepreneur and operating your small business is a lot of hard work, but it’s also extremely fun and rewarding. Taxes, on the other hand, are a by-product of owning a business, and they’re usually neither fun nor rewarding. In one survey, approximately 93% of small business owners overpaid on taxes for a number of years. Entrepreneurs are already walking precarious tightropes when it comes to budgets, and tax season mistakes only make the struggle more real.
But, burdensome as they might be, taxes are an unavoidable aspect of running a business. Get it right, and you can save lots of money. Get it wrong, and you could be paying much more than you owe. To save you from despair, we’ve compiled a few simple tax tips* that’ll take you from hysteria to cool and collected during tax season.
1. Take advantage of small business tax deductions
One of the easiest ways to trim your tax bill is to make sure you claim all of the tax deductions available to your company. The first step is to learn which tax deductions you can claim — the second step is to be conscious of their limits and individual timing issues.
So, what qualifies for deduction? The IRS says:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Items that would qualify as both ordinary and necessary are payments to employees and contractors, retirement plans, car and truck expenses, utilities, and travel, to name just a few. For a more thorough list and explanation of what is and is not deductible, see the IRS’s lengthy publication.
2. File your taxes on time
Sounds simple, right? Yet thousands of small business owners every year incur costly penalties for failing to pay their taxes on time. A penalty for filing late is one of the steepest fines — this penalty is 5% a month and can reach a maximum of 25%. Usually, the failure-to-file penalty is more than the failure-to-pay penalty, so make sure you file your tax return on time each year, even if you can’t pay all the taxes you owe by the due date.
3. Consider hiring a tax pro
Small business owners often wear many hats: business operations, hiring, marketing, sales, public relations, and the list goes on. But even if you think you can prepare your taxes yourself using one of the many online software solutions, a CPA or other tax professional may be a better option to wear the accounting hat. Think about how valuable your time is and how many hours a professional will save you. If you’re spending days and weekends preparing your tax documents, then a tax pro may well be worth the cost.
A seasoned tax expert knows how to get you the most beneficial tax deductions and benefits. This expertise will usually save your business at least as much as the tax professional’s fee, plus you get peace of mind knowing your return has been prepared and appropriately filed on time. Peace of mind for an entrepreneur? Now that’s priceless!
4. Donate your excess inventory
Businesses can make tax-deductible donations to legitimate nonprofit organizations like schools, hospitals, and orphanages. If your company has unsold inventory, you can donate it for tax deductions instead of spending cash to store and remarket it. Business donations of cash, supplies, and even property are eligible for deduction. Unfortunately, the tax rules overseeing donating inventory are complex with different limitations for C corporations versus S corporations — so do your due diligence on the business you intend to donate to and the specific IRS regulations.
5. Get organized now — don’t Procrastinate until January or February
Maintain clean books and supporting documentation throughout the year so you can benefit from all the tax incentives and avoid late filing penalties. This foresight can also reduce the fees associated with hiring a tax professional to help with filing. The early months of the year are an important time for businesses to recover from the holidays and start ramping up for the busier summer months — you can’t afford to waste valuable time scrambling to get your taxes prepared.
Every minute and every penny counts for small business owners living the entrepreneurial grind. Planning can help your business save time and money, plus spare you a major seasonal headache.
Written by Jesse Sumrak**
Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He’s created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he’s not dabbling in digital marketing, you’ll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.
*This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.
**The author is not an employee of Expansion Capital Group.