Do you think that as an entrepreneur or as the owner of a small business you are paying the right amount of taxes?
If you think the answer is “yes,” you might want to consider consulting a wide range of sources, because there might be several tax-savings decisions you can make before and after April 15 to save money on this year’s tax return and future tax returns.
In fact, the answer to the question is probably “no.” About 93 percent of small business owners have paid too much taxes at some point in the past 12 years, according to the Entrepreneur magazine article “10 Tax-Savings Hacks That Small Business Owners Often Miss.”
You definitely want to be a 7 percenter, so to speak, but before we give you advice on pre- and post-April 15 tax tips, let’s take a quick look at the historic tax bill that President Donald Trump signed into law in December, 2017 and how it affected small businesses.
The most crucial aspects of the new law for entrepreneurs and small businesses are the following:
* Pass-through businesses such as LLCs, partnerships, S-corporations, and partnerships can deduct 20 percent of their business income from a Schedule C tax return. If they earned $200,000 in 2017, they only have to pay taxes on $160,000 of that income. “Small-Business Owners Win Big” is how this Kiplinger article summarized the impact of this change.
* The business loan interest deduction is now limited to 30 percent of a company’s earnings before amortization, depreciation, interest, and taxes.
* The deductibility of R&D expenses, the payout of tax credits for historic buildings, and how much net operating losses can defray taxable income has been changed. This article in the online publication Small Business Trends details the changes.
* The top tax rate on corporate income is now 21 percent. It was 35 percent. In addition, the alternative minimum tax for corporations was eliminated.
Pre-April 15 Recommendations
The sources consulted by Wealth Authority recommended dozens of decisions you can make to reduce your tax liability on your 2017 income tax returns. They include:
* The new tax law has several changes that are pertinent to people who began using a passenger car in 2018 for their small business and used that car for their business more than 50 percent of the time, according to this MarketWatch article. Among other changes, the new law dramatically increased the luxury auto depreciation allowance to $10,000, $16,000, and $9,600 for the first three years the car was used for business. Unfortunately, the law also eliminated deductions for unreimbursed vehicle expenses.
* Besides the depreciation allowances, small business owners who use their cars for business should also deduct their car expenses. That includes insurance, repair costs, and gas. The key to figuring out how much you can deduct is figuring out the percentage of miles your car was used for business purposes. If your expenses were $5,000 and 60 percent of your miles were for business, you can deduct $3,000 or use the IRS’s standard mileage rate. Here’s another tip — plan your business and personal trips to maximize the percentage of miles used for business.
* While you’re on your trips, you can also deduct 50 percent of the cost of your business-related meals. “This includes taking a client – or even a potential client – out to lunch,” reports the article “Top 24 Business Tax Savings Tips for 2018.” “It could also include ordering pizza for the office as a special treat for your employees.”
* Taking a tax deduction for using part of your home for an office will NOT trigger an audit, reports the Business Insider article “5 pieces of terrible tax advice you should ignore.” Homeowners and renters can use this deduction. The deduction is based on what part of their residence is used for an office. The Entrepreneur magazine article points out that Internet service expenses, other utilities, repairs, and insurance can also quality as home office expenses.
* Getting tax deductions for donating unsold or unused inventory is preferable than spending money to store that equipment, FitSmallBusiness reports in its “Top 24” article. Abandoning old equipment so it qualifies as an ordinary loss that is fully tax deductible might be a better option than selling it, Entrepreneur magazine reports.
Long-Term Recommendations
The best way to prepare your tax forms is to make smart decisions throughout the life of your business that will minimize your tax liability. The decisions that Wealth Authority’s sources recommend include:
* Use tax software: The IRS reports that 21 percent of paper tax returns have errors, but only 1 percent of online tax returns have errors, according to the Forbes magazine article “7 Easy Tax-Saving Tips For Small Business Owners.” “Tax planning software is a must for small business owners,” the article recommends.
* Use independent contractors: Employers have to pay payroll taxes on employees, but not independent contractors. It’s 100 percent crucial, though, that you understand what an independent contractor is. Treating employees as independent contractors is illegal and could result in IRS fines.
* Set up a retirement plan: Retirement plans “can provide several tax benefits for you, your business, and your employees,” says the article on 24 business tax savings tips. Not only are employer contributions to the retirement plan tax-deductible, but the assets in the plan grow tax-free. The “Tax-Savings Hacks” article notes that small business owners under 50 years of age are allowed to contribute up to $5,500 per taxpayer to a Roth or traditional Individual retirement account (IRA) while older people can contribute up to $6,500.
* Keep a list of deadlines: The Entrepreneur magazine article “4 Tax Tips for Small Business Owners Determined to Pay Only Their Fair Share” recommends checking a calendar that lists deadlines for filing tax forms frequently. You should also be aware of upcoming due dates.
* Select the right kind of business: Should your company be a sole proprietorship? A general partnership? A limited partnership? A limited liability company? A C corporation? An S corporation? Each kind of business structure has tax implications. There are numerous sources that will inform you about them.
Taxes are a pain in the you know what, but minimizing your tax liability can be the difference between success and failure for a small business, including yours.
Regards,
Ethan Warrick
Editor
Wealth Authority
