7 Tax Tips for Small Business

It’s not a sexy topic. My dad’s a CPA who had his own accounting business when I was a kid, and every year when tax season hit it wasn’t pretty. His hours became grueling. The stress was palpable. My whole family felt like we were doing taxes by proxy.

The whole stress factor is why it’s worth looking at tax tips.

Minimize stress. Anything you can do to alleviate problems and zip through filing taxes smoothly will minimize stress.

You need to save your valuable brain power for the valuable task of running your business at peak performance. And when you do that, it’s sexy—sexier than doing taxes, at least. But what isn’t?

1. Know the Affordable Care Act

Has your business been growing? You have until April 1 to take advantage of the grace period. Wait, what grace period? In 2015, if you had more than 50 full-time employees, or Full-time Equivalent (FTE) employees, you had to offer health benefits to 95% of your employees by 2016. The benefits have to meet a minimum requirement.

If you were an Applicable Large Employer (ALE) in 2015 and didn’t know it (FTE employees could have pushed you into large employer status) you’ll have to meet ACA requirements by April 1—or the Federal government will penalize you.

2. Know warnings on write-offs

You have to have extensive records to get the most out of write-offs. But there are other considerations. Were you a startup in 2015? If you didn’t sell anything until 2016, you can’t write start-up expenses off yet.

Did you make a decision to move your business and as a result you bought a more fuel efficient car? Did you take minutes? That car could be part of a write-off, but if you didn’t document the decision-making process, you can’t claim it (unless of course it’s an EV—but that’s not a business write-off, per se, it’s a tax credit). See the IRS rules.

Basically, don’t write anything off unless you’re certain you can. If you’re starting up in 2016, sell something by 2017. If you sell something, you can choose to deduct $5,000 for the first year’s expenses. After that, you can deduct applicable start-up expenses for the next 15 years.

3. Know the Home Office Deduction

Do you have a workspace at home? Chances are you can get the home office deduction. Here’s a list of qualifications:

• Exclusive use – You must use the space only for your business; any other use must be the same as what you’d see at a regular office
• Regular use – You have to use the space consistently each week
• Main business space – You have to use the space to (at minimum) conduct administrative or managerial chores
• Use exclusions – If the space is for a day care or storing business inventory, the exclusive use qualification doesn’t apply

You can calculate how much space qualifies in one of two ways:

• Divide the square footage of your workspace by that of your house; or
• Take the simplified option, an automatic $5 per square foot you use

In addition to the deduction for using the space, you can write off:

• Direct expenses – Business phone lines, supplies, etc.
• Indirect expenses – Part of utilities, home owners insurance, etc.
• Interest and property taxes
• Rent – If you’re renting the space, write off a commensurate percentage of rent

4. Know how to stay sane

Many entrepreneurs have to take a DIY approach to taxes because of budget constraints. If that’s the case for you, there are some important things to keep in mind:

• Use advanced organization – Use apps and the cloud, digitize receipts, backup data, generally get away from a “shoebox” method of organization
• Use software – There are plenty of options for cloud accounting software, which can reduce the tax headache a great deal
• Be Zen about it – This involves not only embracing the agony of taxes, but developing a comfortable balance if you’re working from home
• Balance taxes appropriately – You may want to expedite deductible expenses and defer income payments from clients, because you’re taxed on that income; but if you’re projecting higher income for 2016, deferring 2015 income payments may not be the best idea
• Consider hiring a professional – A CPA just makes dealing with the IRS so much easier (too bad my dad’s retired)

5. Know about business retirement plans

Contributions you make to retirement plans are tax deductible. According to my dad, a small business owner can contribute up to $53,000 in a given year and deduct it. That’s pretty fantastic! Here are three plans to consider:

• Simplified Employee Pension Plan (SEP IRA)
• Savings Incentive Match Plan for Employees (SIMPLE IRA)
• Self-Employed 401(k) plan

If everyone in your business has an ownership stake, the Self-employed Plan is great because you can contribute, and write off, the most money out of all these plans.

The SEP IRA allows only the employer to make contributions—these are contributions for employees, which you then write off.

The SIMPLE IRA is for the business with up to 100 employees. If you’re planning on growing your business and you want employees to be able to contribute to their IRA, this one makes the most sense.

All of these plans render contributions tax-exempt. Simply put, they’re better for a small business than a traditional 401(k) because they have lower setup costs and fewer administrative responsibilities.

6. Know whether to file as Sole Proprietor or S Corporation

If you’re currently a Sole Proprietor, take a look at what your self-employment taxes end up being this year. You might want to change to an S Corp. If you’re starting a business and want to file as a Sole Proprietor, be aware the self-employment taxes are 12.4% of income for Social Security (up to a ceiling, after which that number goes up), and 2.9% Medicare.

If you file as an S Corp, you avoid that self-employment tax. You’re not taxed on dividends that go to you as a shareholder. There’s more paperwork involved to be S Corp, and I recommend you ask your accountant if this is a good option for you.

7. Know exactly which employees are 1099-C

You avoid a lot of taxes when you enlist 1099 contractors. For that reason, among others, many small businesses have been upping the amount of contractors on their roster. But the IRS will be looking hard at whether these contractors actually qualify for the 1099-C. Make sure they’re all classified correctly, so you don’t get audited.

This is a guest post by Daniel Matthews.