Tax Strategies for Business Owners
Tax planning is the process of looking at various tax options that result in reduced or eliminated tax liability.
Although tax avoidance planning is legal, tax evasion – reducing the amount of tax owed through deceit, fraud, or concealment – is not. Be sure to meet regularly with your accountant or financial planner to make sure you take advantage of opportunities to reduce taxes, without doing any fraudulent.
Tax Planning Strategies
When developing your business tax planning strategies, consider your personal and business tax situations. Strategies should then be based on accomplishing one of these goals:
- Reducing the amount of taxable income
- Lowering your tax rate
- Controlling the time when the tax must be paid
- Claiming any available tax credits and deductions
- Controlling the effects of the Alternative Minimum Tax
- Avoiding the most common tax planning mistakes
Start this planning process by estimating your personal and business income for the next few years, then estimate your tax bracket.
Schedule your free consultation* with Patriots Tax & Accounting to discuss ways in which you can save money during tax season. Options include:
- Maximizing Business Meal Expenses
- Business Automobile Deductions
- Home Office Deduction
7 Ways to Save More Income Taxes
- IRA Funding Trick
- Determine the Best Retirement Plan for You
- Make Your Landlord Pay for Improvements
- Deduct Home Entertainment Expenses
Home Office Deduction
The IRS applies a 2-part test to determine if the home office is the principal place of business.
- Do you spend more business-related time in your home office than anywhere else?
- Are the most significant revenue-generating activities performed in your home office?
Under the IRS rules, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used “exclusively” on a “regular basis.” To qualify for a home office deduction, you must meet one of the following requirements:
- Exclusive and regular use as your principal place of business
- A place for meeting with clients or customers in the ordinary course of business
- A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities
Small Business Tax Misperceptions
The complexity of tax law makes it easy for misinformation to lead to costly mistakes. Here are some of the more common small business tax misperceptions we see.
1. All Start-up Costs Are Immediately Deductible
Business start-up costs refer to expenses incurred before you begin operating your business. Examples of these costs include advertising, travel, training and assets.
You can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred; however, the $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000, and any remaining costs must be amortized.
2. Overpaying the IRS Makes You “Audit Proof”
The IRS wants to ensure you substantiate your deductions, regardless of overpayment in another area. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is best to audit proof yourself by documenting all expenses and consult with a professional accountant at Patriots Tax and Accounting.
3. You Can Take More Deductions if You Are Incorporated
Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden.
4. The Home Office Deduction Is a Red Flag for an Audit
While it used to be a red flag, this is no longer true if you keep excellent records that satisfy IRS requirements. A high deduction-to-income ratio, however, may raise a red flag and lead to an audit.
5. Business Expenses Are Not Deductible if You Don’t Take the Home Office Deduction
You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.
Tax reform legislation passed in 2017 repealed certain itemized deductions on Schedule A, Itemized Deductions for tax years 2018 through 2025, including employee business expense deductions related to home office use.
6. Requesting an Extension on Your Taxes Is an Extension To Pay Taxes
Extensions enable you to extend your filing date only, not an extension on penalties and interest owed. You are responsible for paying these and they begin accruing on the original tax due date.
7. Part-Time Business Owners Cannot Set Up Self-Employed Pension Plans
If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.
Call us today to schedule a free consultation* and see how we can help your business.