5 Tips to Save on Your Small Business Taxes

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Ajay Kumar, CPA, MBA

If you’ve purchased a business this year or are new to small business tax structures, there are a few things to keep in mind. While it is possible to do your taxes on your own, consider working with a CPA. A tax professional can ensure your business is taking advantage of all the deductions available and, more importantly, can ensure you’re paying everything you owe. Here are five other tips:

• Think about taxes all year long. Small business owners should not treat income taxes as an annual event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.

• Be aware of law changes. Even with the help of a skilled professional, a small business owner must keep up with new changes. This will ensure your tax professional is doing the best possible job, and it keeps you informed as a business owner.

• Don’t make assumptions. Never make business decisions assuming that particular tax breaks will pass or that certain policies will be enacted.

• Choose the right state to incorporate in. You don’t need to incorporate your business in the same state that you run your business. If you are just starting out, here are some of the best states to consider incorporating your business in.

• You don’t actually want a tax refund. It is possible to get a tax refund as a small business, but in most cases, it isn’t to your benefit. Typically, a refund means you overestimated the amount of taxes you paid, which could have been reinvested back into your business.

Choosing your type of business entity
One of the first decisions that you need make is to choose the type of business entity that you wish to operate as. Your choice plays a factor in your personal liability for the business’ activities and how taxes are imposed on the business and yourself as the owner. The most common forms of business are:

• Sole Proprietorships – Subject to income tax at the individual level, subject to the self-employment tax

• Partnerships – Subject to income tax at the individual level, subject to the self-employment tax

• C corporations – Income earned by a corporation that has not elected to be an S corporation is taxed at the corporate level; with shareholders of the corporation being treated as employees subject to payroll taxes on their wages.

• S corporations – Subject to income tax at the individual level, shareholders treated as employees subject to payroll taxes Each form of business has its own advantages and drawbacks that can affect the taxes for your small business, so it’s always advisable to consult a tax professional as to which is best for you.

LLC vs Corporation

Should I buy a car/truck in the business name
A lot of people ask me if they should buy their car/truck under the business name or personal name. Typically, the answer is that it depends on what kind of business you are in (product vs Service), what kind of company you have (LLC, S-Corp, C-Corp, etc), how do you intend to use the vehicle (only business use, personal use, or mixed-use). Here is a brief summary of the pros and cons of each situation:

Company Owned Vehicle
If the company truly owns the car and wants to claim the asset depreciation and lease expenses then the title needs to be in the company’s name. This might be a challenge with car loans, insurance, and leases. If you buy the car yourself and then transfer it to the business, you might end up paying the sales tax twice. One of the main reasons to have the company own the vehicle is the ability to take depreciation and claim lease expense, but if someone is driving the company car and get into an accident, the company might get into a liability too just based on ownership. Lastly, and most importantly, any personal use must be considered taxable income if you own more than 2% of the LLC or S-Corp. It can be a lot of work for not much gain… more like jogging a mile to get French Fry.

You Own the Vehicle, Get Reimbursed for actual expenses
This may be a good option if depreciation is not a big consideration. You would own the vehicle yourself and turn in expense reports. This works because first, you are reducing the net income of your company, second, in most situations, actual car expenses are higher than the standard mileage rate. The reimbursement paid by the company is tax-deductible for the company.

You Own the Vehicle, Take standard Mileage Deduction
This may be the easiest option if tracking actual expense is too cumbersome. Please note that you still need to maintain written mileage logs detailing odometer readings, date, business purpose or connection, etc.

Buy or Lease
• Buying or leasing greatly depends on your situation.
• Buying may be a better option if you want to claim depreciation or plan to drive a lot of miles over the year.

• Leasing may allow you to change/upgrade the vehicle frequently without carrying a debt.
Small business tax deductions
Advertising and promotion
The cost of advertising and promotion is 100 percent deductible. This can include things like:
• Hiring someone to design a business logo
• The cost of printing business cards or brochures
• Purchasing ad space in print or online media
• Sending cards to clients
• Launching a new website
• Running a social media marketing campaign
• Sponsoring an event
Business meals
You can generally deduct 50% of qualifying food and beverage costs. To be eligible for the deduction:
• The expense must be an ordinary and necessary part of carrying on your business
• The meal cannot be lavish or extravagant under the circumstances
• The business owner or an employee must be present at the meal
You can also deduct 50% of the cost of providing meals to employees, such as buying pizza for dinner when your team is working late. Meals provided at office parties and picnics are 100% deductible.
Business insurance
You can deduct the premiums you pay for business insurance.
This may include:
• Property coverage for your furniture, equipment, and buildings
• Liability coverage
• Group health, dental and vision insurance for employees
• Professional liability or malpractice insurance
• Workers compensation coverage
• Auto insurance for business vehicles
• Life insurance that covers employees, as long as the business or business owner is not a beneficiary on the policy
• Business interruption insurance that covers lost profits if your business is shut down due to fire or another cause
Business use of your car
Do you use your vehicle for business? If you use your vehicle solely for business purposes, then you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.
There are two methods for deducting vehicle expenses, and you can choose whichever one gives you a greater tax benefit.
• Standard mileage rate. Multiply the miles driven for business during the year by a standard mileage rate. Beginning January 1, 2019, the standard mileage deduction is $0.58 per mile. In 2018, it was $0.54 per mile.
• Actual expense method. Track all of the costs of operating the vehicle for the year, including gas, oil, repairs, tires, insurance, registration fees, and lease payments. Multiply those expenses by the percentage of miles driven for business.

Depreciation

When you purchase furniture, equipment, and other business assets, depreciation rules require you to spread the costs of those assets over the years you’ll use them rather than deducting the full cost in a single hit.
Expensing these items upfront is more attractive because of the quicker tax benefit. Fortunately, the IRS gives business owners several ways to write off the full cost in one year.
• De minimis safe harbor election. Small businesses can elect to expense assets that cost less than $2,500 per item in the year they are purchased. You can read more about the de minimis safe harbor election in this IRS FAQ.
• Section 179 deduction. The Section 179 deduction allows business owners to deduct up to $1 million of property placed in service during the tax year. This includes new and used business property and “off-the-shelf” software. The Section 179 deduction is limited to the business’s taxable income, so claiming it cannot create a net loss on your return. However, any unused Section 179 deduction can be carried forward and deducted on next year’s return.
• Bonus depreciation. Businesses can take advantage of bonus depreciation to deduct 100% of the cost of machinery, equipment, computers, appliances, and furniture.
If you purchased a new vehicle during the tax year, the IRS limits write-offs for passenger vehicles. In the first year, if you don’t claim bonus depreciation, the maximum depreciation deduction is $10,000. If you do claim bonus depreciation, the maximum writes off is $18,000.

Education
Education costs are fully deductible when they add value to your business and increase your expertise. In order to decide if your class or workshop qualifies, the IRS will look at whether the expense maintains or improves skills that are required in your current business.

The following list contains examples of valid business education expenses:
• Classes to improve skills in your field
• Seminars and webinars
• Subscriptions to trade or professional publications
• Books tailored to your industry
• Workshops to increase your expertise and skills
• Transportation expenses to and from classes
Home office expenses
If you use a home office for your business, you may be able to deduct a portion of your housing expenses against business income. There are two ways to deduct home office expenses.

• Simplified method. You can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.

• Standard method. Track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to business use.

Legal and professional fees
Legal and professional fees that are necessary and directly related to running your business are deductible.

Moving expenses
The Tax Cuts and Jobs Act of 2017 eliminated the deduction for moving expenses for all nonmilitary individuals, but businesses can still deduct the cost of moving business equipment, supplies, and inventory from one business location to another.

Rent expense
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense.

Salaries and benefits
Salaries, benefits, and even vacation time paid to employees are generally tax-deductible, as long as they meet a few criteria:
• The “employee” is not the sole proprietor, a partner, or an LLC member
• The salary is reasonable, ordinary, and necessary
• The services were actually provided

Taxes and licenses
You can deduct various taxes and licenses related to your business. This may include:
• State income taxes
• Payroll taxes
• Personal property taxes
• Real estate taxes paid on business property
• Sales tax
• Excise taxes
• Fuel taxes
• Business licenses
Telephone and internet expenses
If telephone and internet services are integral to your business, they can be deductible business expenses.

Travel expenses
Deductible, IRS approved business travel expenses include:
• Travel to and from your destination by plane, train, bus, or car
• Using your car while at a business location
• Parking and toll fees
• The cost of taxis and other methods of transportation used on a business trip
• Meals and lodging
• Tips
• Dry cleaning while on a business trip
• Business calls
• Shipping of baggage and sample or display materials to your destination
• Other similar ordinary and necessary expenses related to your business travel

Personal tax deductions for business owners
The above-mentioned deductions can be claimed on Schedule C or Form 1065, but there are a few other tax breaks small business owners commonly claim on their individual returns.

Retirement contributions
You can deduct contributions to employee retirement accounts as a business expense, but business owners who contribute only to their own retirement funds

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