Tax Tips for Small Businesses

Tax Law and News tax practice client review

In general, try to collect and organize your tax records, documents and QuickBooks® files prior to the filing deadline, in order to avoid the last-minute scramble and potential fees. Here are the best ways you can save some tax dollars and avoid some major compliance headaches.

Tax Deductions

You’re allowed to deduct the costs of running your business, as long as the expenses are ordinary and necessary. You cannot deduct personal, living or family expenses. However, if you have an item that is used for both business and personal purposes, such as a vehicle, you would allocate the expense and deduct the business portion (excluding commuting miles). Be sure to document the expenses and retain any receipts. Refer to IRS Publication 535 for tax deductions you may have overlooked, such as out-of-town business travel costs and depreciation on your business car or truck.

Enhanced Depreciation Deductions

Businesses are allowed to claim a 50 percent bonus depreciation deduction for the purchase of new assets. This represents the percentage of the purchase price of new capital assets that a business owner can write-off in the first year. Personal property, such as furniture and equipment, qualifies, but real estate does not. For example, if ABC buys an asset for $100,000, the business can claim $50,000 bonus depreciation in year one. In addition, the company is allowed to depreciate the remaining basis of $50,000 over five years, or $10,000 per year.

Even though the purchase of used property does not qualify for bonus depreciation, it does qualify for a Section 179 expense deduction, which carries a $500,000 limit. This is a complementary measure allowing for a write-off of the cost in year one. Certain types of real estate qualify for the section 179 deduction, with a $250,000 limit. In the example above, ABC would be able to expense the entire $100,000 cost in the first year.

Retirement Plans

There are a variety of retirement plans available to small businesses. Contributions made by the owner for himself or herself, and for employees, can be deducted. Furthermore, the earnings on the contributions grow tax free, until the money is distributed. In general, contributions to these retirement plans can be made up until the due date of the tax return. Consequently, the small business owner can invest money in a plan after year end and still take a deduction on the 2015 tax return. The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan.

Start-up Expenses

The government encourages people to open a new business by allowing a $5,000 write-off for start-up expenses. This $5,000 deduction is reduced by the amount that your total start-up expenses exceed $50,000. Any start-up costs that are not allowed to be expensed can be amortized over a 15-year period. Start-up costs include amounts paid, either to create a trade or business, or to investigate the creation or acquisition of a trade or business. Examples include advertising the opening of a business, employee training and a market survey.

Home Office Deduction

The IRS now provides a simplified calculation for figuring the deduction for using your home for business. It simplifies the calculation and recordkeeping requirements, but does not change criteria for who may claim the deduction. A portion of the home must still be used exclusively, and on a regular basis, for business purposes. In general, you will figure the deduction by multiplying the area of your home used for business by $5, up to a maximum deduction of $1,500. Allowable home-related itemized deductions, such as mortgage interest and real estate taxes, can still be claimed.

Credit for Research and Development Expenses

To qualify for this credit, the business must incur expenses for the purpose of discovering information that is technological in nature, and for the development of a new or improved business component. For example, a bakery that invests in developing machinery that automates the icing process may qualify. Ordinary testing and inspection, consumer, management and efficiency studies, and promotions do not count as research.

Work Opportunity Credit

This credit is available to businesses that pay first and second year wages to certain targeted employees, such as veterans, long-term family assistance recipients and summer youth. The credit is figured as a percentage of the employee’s wages and can range from $2,400 to $9,600 per employee, depending on the type of targeted employee. To qualify, you must first request and be issued a certification for each employee from the state employment security agency (SESA) to prove that the employee is a member of a targeted group.

Miscellaneous

  • There is an underpayment penalty involved when a business doesn’t pay estimated taxes on time.
  • It’s important to plan ahead by running projections of your income and expenses and looking at tax law changes.
  • For small businesses filing Schedule C with Form 1040, the first estimate for 2015 taxes is due on April 18.
  • Be sure to file all types of tax returns (federal and state income tax, payroll tax, etc.) on time to avoid paying any penalties to the government.
  • If you’re confused or concerned about handling these important tax issues on your own, please seek out expert tax advice.

 

Editor’s note: Looking for more tax tips for your small business clients? Read the Intuit® ProConnect™ Tax Pro Center article “Share These 11 Lesser-Known Tax Deductions With Your Clients.”