9 Tips for Small Business Tax Planning

By February 7, 2021 Tax Advice
small business tax planning

Owning a small business entitles you to numerous tax deductions and credits. To maximize your tax savings, however, you need to understand the rules, keep accurate records, and stay up to date on changing tax codes and regulations.

Most small business owners don’t have extra time to devote to these endeavors, so hiring a tax expert is a good investment. Working with a certified tax professional or CPA will ensure your business is taking full advantage of the deductions, write-offs, and other tax advantages available to you. They will also make sure you are informed about constantly changing tax laws and that your business remains in compliance with those changes.

Know What Deductions You’re Entitled to

Whether you do your own business taxes or work with a tax professional, there are several things that every business owner should know about when it comes to tax planning. These tips will help you save time and money when it’s time to file your business taxes.

1. Have an Organized System

Technology has made recording the financial aspects of your business easier than ever, but you still have to have a filing system for receipts and other paperwork. File similar receipts together such as office and travel expenses. Or, scan and organize your receipts digitally. However you choose to manage your receipts, keeping up with the process through the year instead of waiting until tax time will make your life easier.

2. Keep Your Personal and Business Records Separate

Separating business and personal finances allows small business owners to track their spending and identify and document all of their expenses and revenue. Failure to keep personal and business records separate can lead to confusion and mistakes at tax time. This in turn can lead to unnecessary tax audits and penalties if the IRS determines the business owner is guilty of misappropriating funds. To avoid these problems, have a separate checking account and credit card used only for business purposes.

3. Deduct Your Startup Costs

If you started a business this year, you may be eligible to deduct the costs of getting your business up and running. You can deduct up to $5,000 spent on startup costs, including infrastructure as well as research and development. The cost of office furniture, computers, and supplies needed to get your business going are also tax-deductible.

4. Take Advantage of the Home Office Deduction

In order to take advantage of the home office deduction, your home office must be used regularly and exclusively for operating your business and be the principal place of your business operations. Only the percentage of your home that is used for business purposes can be deducted. Other home business deductions include computers, printers, office supplies, and internet service.

5. Keep Track of Your Mileage

The IRS allows you to deduct vehicle expenses related to your business. You can deduct business-related trips throughout the day, such as traveling to buy supplies or attending meetings offsite.

You have two options to choose from for the mileage expenses: the actual expense method or the standard mileage method. The standard mileage rate for 2020 is 57.5 cents per mile. If you use the actual cost method, you’ll need to keep receipts in order to deduct each business-related vehicle expense. This includes gasoline, insurance, maintenance, depreciation, and lease payments.

6. Deduct Business Meals

You can deduct the cost of meals taken either within the course of business travel or if provided to a current or potential business client. You can deduct up to 50% of the meal expense as long as the food or beverages are not considered lavish or extravagant.

For business meals to be deductible, business activity or discussions must be conducted either directly before, during, or after the meal is consumed. Save your receipts and document who was in attendance as well as the purpose of the meeting.

7. Deduct Business Travel Expenses

If you travel out of town for business purposes, the cost of getting to and from your destination and any business-related expenses while at your destination can be deductible.

To be allowable by the IRS, travel expenses must be considered reasonable and not lavish or extravagant. In order to deduct hotel expenses, the business meeting or event must require an overnight stay. Keep receipts for all meals, hotels, and other travel expenses in order to accurately document your expenses.

8. Take Advantage of Tax Credits

The federal government likes to reward business owners when they do things that benefit the greater good. Tax credits are deducted from your income before your taxable gross income is determined.

There are numerous tax credits available for small business owners. For example, you can qualify for a tax credit if you increase health benefits for employees, reduce your environmental footprint, or hire disabled individuals. In addition to federal tax credits, many states offer business tax credits or incentives. Those who qualify can use those credits or incentives to reduce their state tax bill.

9. Fund a Retirement Account

While many business owners contribute to a personal IRA account, small business owners have the option to save more depending on their business, employees, and intentions. This can be done by funding an employer-sponsored retirement savings plan such as a SIMPLE IRA, SEP IRA, or 401(k) plan. Contributions you make for yourself and employees may be tax-deductible, but certain limits and restrictions apply.

Get the Most from Your Tax Planning Efforts

These are just a few of the tax deductions and credits that your business may qualify for. Business owners should view tax planning as a year-round activity rather than a once-a-year event.

Waiting until the last minute makes tax planning and preparation stressful and can limit your ability to take advantage of all the deductions and credits available to you. Working with an experienced tax professional or accountant will help ensure that your business is able to minimize its tax liability and remain in full compliance with all tax laws and regulations.

Orcutt & Company is a full-service financial solutions provider. Our comprehensive service plans are designed with the small business owner in mind. We can handle your bookkeeping, payroll, corporate and personal taxes in one office, with one point of contact.

Our integrated approach is designed to ensure that we understand your personal goals and how they integrate with your business finances. Consultation is fundamental to all our business services. Through our annual review with owners, we look at tax projection, the status of the business, and more.