If you’re like some small business owners, you put taxes out of your mind until tax time. That’s simply too late. Once the calendar year comes to an end, many options to materially affect the net income of your business have vanished for that tax year.
What follows are 5 steps you can take to make the tax process work better for you and your franchise business.
Schedule estimated tax payments. The IRS expects small business owners to pay their tax liability as they make profits throughout the year. Many small business owners do not make these crucial estimated tax payments. That failure can result in a large balance due and underpayment penalties. Small business owners should meet with their tax professional throughout the year to assess their tax situation, ensure they are making the proper amount of estimated payments, and discuss strategies that can lower tax liability.
Maximize deductions. Every year, business owners miss out on deductions or credits that can help reduce their tax liability. According to internal data from ADP, at least 3,000 federal and state incentives are available, but 50 percent go unclaimed. That amounts to tens of billions of dollars that business owners are leaving on the table. Some purposely forgo the incentives, claiming the rules that go along with them are too complex or cumbersome. The complaint is valid, however complexities in the tax code should not stop a business owner from investigating all the tax breaks available to him or her, then making a determination about which ones are best for the business to pursue.
Two substantial tax breaks are in limbo again in 2015 – Section 179 and bonus depreciation. The Section 179 deduction will be reduced from $500,000 to $25,000, unless Congress acts to extend the larger deduction. Section 179 deduction can be used for qualifying business property placed into service in a given year. The deduction allows a business to recover all or the greater part of the cost than depreciation allows. Bonus depreciation is set to expire in 2015 unless Congress acts. This tax break allows businesses to deduct 50 percent of their costs for computers and other new capital equipment purchases in the year in which they were purchased, instead of over several years. Both were extended in late 2014, and the same could happen this year, but business owners will have to wait and see.
Other deductions to consider include:
- Business use of car. Businesses can deduct actual expenses, including gas or oil, insurance, licenses and registration, interest on a non-lease auto loan, lease payments, parking fees, repairs, garage rental space, and more. Or they may choose to deduct using the standard rate for miles driven. When using the standard mileage rate, businesses may also include fees for parking and tolls. For 2015, the rate is 57.5 cents per mile. Whichever method your business uses, it is essential that you maintain a mileage log.
- Meals/Entertainment: Businesses may deduct 50 percent of business-related meals and entertainment expenses, including: travel away from home on business; entertaining customers at a restaurant or other location; attending a business convention or business meeting.
- Advertising expenses: The following costs count as advertising expenses: business cards, newspaper ads, greeting cards sent to customers, and sales literature.
- Other deductible business expenses: These include but are not limited to commissions and fees, product liability insurance, insurance licenses, supplies, business telephone, interest on business loans, office expenses, gifts limited to $25 per person/calendar year, rent on business property, repairs and maintenance on office equipment, business and professional dues and trade publications and preferred customer programs.
Access health insurance. In 2016, Affordable Care Act (ACA) rules for businesses with 50-99 employees go into effect. That means those employers will have to provide health insurance coverage for their full-time equivalent employees or they may face a penalty. Some things to consider about ACA:
- The Health Insurance Marketplace offers options for coverage for individuals and their families. If you do obtain coverage in the Marketplace, annual income from your business will be tightly coupled with your monthly premium costs. Changes in your net income from business could cause an increase or decrease in your monthly premiums.
- Businesses with fewer than 25 full-time equivalent employees have options for affordable coverage for their employees. They may be eligible for the Credit for Small Employer Health Insurance Premiums.
- Businesses with fewer than 50 full-time equivalent employees can take advantage of the Small Business Health Options Program (SHOP). Currently, small businesses pay on average 18 percent more than larger businesses for health insurance. The SHOP Marketplace offers small employers increased purchasing power so they can obtain higher-quality coverage at a lower cost.
Recordkeeping matters. Without good records, you open your business to cash flow issues and tax woes. Consider double-entry cloud-based accounting software that allows users to access it anywhere. The software won’t replace a financial adviser, but it will help business owners keep records organized and in order. One plus with double-entry bookkeeping software is that for each credit you input, the software automatically includes the corresponding debit, and vice versa.
Talk with your tax adviser. There’s not much more to add here. Your tax adviser is the person who best understands the tax code and how it may affect your business. It’s important to have an ongoing dialogue with your tax adviser so you can be sure you maximize deductions and take advantage of tax savings that will help improve your bottom line. Your tax professional can help you establish a plan and structure for keeping business records. He or she should encourage you not to mix business and personal financial records and to establish a separate business bank account or bank card. One of the first things the IRS will look at in a business audit is bank records, so it’s important not to have muddied waters. Separate accounts will also help during tax time. Your tax pro will be able review the business account and help you properly classify expenses and income on your tax return.