By Oliver Kardos, Senior Vice President, Business Banking, KeyBank
April 15, 2016, is fast approaching. For small business owners, this means it’s time to get your year-end finances in order, because even if you’ve failed to get out in front of your taxes over the past year, there are a number of things you can still do to reduce your tax burden.
For starters, simply filing your taxes accurately and on time can save you money by helping you avoid late payment penalties and other costly mistakes. This starts with being organized, so that your tax advisor or accountant can easily find the information they need.
If your current records look more like a stack of papers than carefully labeled and ordered file folders, then it’s time to get to work. Separating your expenses into the following seven categories can help.
- Startup costs. If you are a new company, it is important to understand your startup costs — what you can and can’t claim for 2015. Of course you want to maximize your deductions, but doing it right the first time will save you in the long run. You should discuss this with your tax advisor or accountant to make sure you maximize these costs. This may mean spreading out deductions over time.
- Home office deduction. You can deduct the area of your home office that is exclusively and regularly used for business purposes. To determine the appropriate deduction, calculate the total square footage of your home divided by the square footage of your office. This percentage also applies to utility bills, insurance, mortgage and maintenance expenses. For those who want an easier formula, the IRS now allows a standard deduction option designed to make it easier for taxpayers to claim their home office. This option allows you to claim $5 per square foot with a maximum size of 300 square feet.
- Mileage and travel expenses. If hitting the highway and visiting clients is part of your job, don’t forget to claim your mileage. There are two methods for doing this: standard and actual. The standard method for calculating mileage in 2015 is 57.5 cents per business mile plus tolls and parking. The actual method is to add up all automobile expenses — including gas, repairs, oil change, car insurance and car washes — and then multiply it by your business percentage, which is determined by dividing your business miles by total miles for the year.
- Employee vs. independent contractor. Hiring an independent contractor instead of an employee will save you on Federal Insurance Contributions Act (FICA) taxes. Just make sure you don’t misclassify employees. Familiarize yourself with the difference between the two in order to save yourself from tax trouble down the road. Have your independent contractor fill out a W-9 for your records.
- Depreciation deduction. Consult with your tax advisor on newly purchased property and equipment for your business. You may qualify for a full write-off using the section 179 depreciation deduction. This allows you to deduct the entire amount of the purchase instead of increments of annual depreciation each year.
- Health insurance deductions or credits. If you are self-employed you may be eligible to deduct your health and dental insurance premiums. If you are a small business employer you are eligible for the small business health care credit if you employ fewer than 25 full-time equivalent employees; the average annual wages of your employees are less than $50,000 (adjusted for inflation beginning in 2014); and you pay a uniform percentage for all employees that is equal to at least 50 percent of the premium cost of employee-only insurance coverage. Also, don’t forget the Affordable Care Act. Small businesses need to make sure they are adhering to and complying with the ACA to avoid fines.
- Contribute to a retirement account. Consider contributing to an IRA. You have until April 18, 2016, to make IRA contributions for 2015. However, the sooner you get your money into the account, the sooner it has the potential for tax-deferred growth. In addition, making deductible contributions will reduce your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2015 or $6,500 if you are 50 or older. If you are self-employed, you may have a Keogh plan. These plans need to be established before December 31 but contributions may still be made until the tax filing deadline for your 2015 return. The amount you can contribute depends on the type of Keogh plan you choose.
File on time and don’t pay late. If you really find yourself struggling to get your return in by April 15, file for an extension. It is better to file an accurate return than one on time that is full of mistakes. However, the extension is an extension to file your return — not an extension to pay the tax.
Again, the best approach to minimizing your tax burden is to be organized and maintain an open channel of communication with your tax advisor or accountant, as well as your small business banker. It is far easier to plan ahead than play catch up. So think of April 15 not as a finish line. Instead, consider it the
Oliver Kardos is senior vice president and Business Banking market leader for KeyBank in the Capital Region He may be reached by phone at 518-257-8562 or email at [email protected] This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. © KeyCorp 2016. KeyBank Member FDIC.
Looking ahead: Tax tips for launching a small business
Are you getting ready to launch a small business? If so, you’re likely feeling a combination of excitement and stress. Beyond developing your product and service, shaping your brand and figuring out how to bring it to market, you still have to deal with the “money” side of the business. For some, this is a major obstacle, but it doesn’t have to be — provided you have a plan.
First and foremost, make sure you choose the proper business structure for your company. Many small businesses make the mistake of filing as a C Corporation, which leads to double taxation — the profit of the corporation is being taxed when earned and then again when the profit is distributed as dividends. Instead, look into a limited liability company (LLC) or an S corporation. Schedule a meeting with your attorney, tax advisor or business banker to discuss the different types of businesses and what would work best for yours.
Keep personal expenses separate from business expenses. This might sound obvious, but sole proprietors and small business owners often mix the two, which makes separating business expenses from personal expenses difficult and time consuming come tax time. The best way to avoid this is to set up a separate business checking account for all business transactions, including income and expenses.
Consider investing in accounting software. Programs and phone applications such as FreshBooks, Quickbooks, Xero, and Avalara can help you track your income and expenses throughout the year, which will make year-end tax filing easier.
Prioritize budgeting and tax planning. Both tasks should be continuous throughout the year. Running monthly reports and regularly reviewing them with your financial advisor and business banker can help you identify opportunities to both limit your tax liability and grow your business.
Finally, look ahead. Consider deductions for a home office or employing your children; create a health reimbursement arrangement; and research retirement plans designed specifically for the self-employed, including an IRA, SIMPLE, SEP, Single 401(k), and Keogh plan.
These tips will help you position your business for success. And the more you focus on developing and executing your plan, the closer you’ll get to your ultimate goal — developing an exit strategy for a business you have grown and loved on your terms.