Tax season is a stressful time for many, including business owners who need to report payroll, annual invoices, etc. The standard stresses can become even greater when companies save their paperwork to the last minute instead of executing it properly throughout the year.
Though tax paperwork can be overwhelming, it pays to be familiar with it and fill it out in a timely and accurate manner. When companies have a good understanding of what deductions are available and apply for them properly, they stand to save a lot of money.
To help keep your tax costs down, here are some of the most effective tax pointers that should help channel some money back into your business.
1. Apply for the Section 179 Deduction
Section 179 of the Internal Revenue Service tax code allows businesses to claim deductions for purchases of assets that fall under one of the following categories: Vehicles weighing 6,000 pounds or above, machinery/equipment, business furnishings (computer, office desk, etc.), improvements (HVAC, fire alarms, etc.), and real estate (this depends on the amount of time the property is used for business-related activities).
The two key requirements of the deduction are that the asset must be depreciable and that the business must start using it in the same year that it was purchased. One especially useful aspect of this tax code is that it enables all of the deductions to be made at once, rather than spreading them out over a period of time that the asset remains in use.
2. Look into Captive Insurance
Captive insurance firms are both owned and managed by the companies they insure, and the premiums paid to the insurer are a tax deduction for the business rather than an income to the Captive. Also, because there are special tax rules in place for insurance companies, Captives can take deductions for loss reserves, creating deferred taxation.
There are several Captive products out there for businesses, but your business typically needs to be generating $500,000 in annual earnings for Captive insurance to be worth it (as there is a lot of work involved). It generally requires more than a quarter of a million dollars to form a Captive, which covers the expense of attorneys, insurance consultants and actuaries.
3. Use Payroll Service or Software
According to Paycor, 40 percent of small businesses in the U.S. are penalized each year by the IRS for failing to file payroll taxes correctly. The average payroll penalty is $845. This is an expense that could be easily avoided by using reliable payroll software. Paycor itself, for instance, is a solution that improves companies’ payroll filing through general ledger integration and handy HR resources like employee pay records, salary policies and custom templates.
However, if you’ve already been penalized for incorrect or late filing, you can work with professional tax relief experts to negotiate an agreement with the IRS that may reduce your fines and prevent collection action. Rather than waiting until you begin to receive threatening letters from the tax collection agency, consider taking action at the first sign of payroll tax problems.
4. Consider Becoming an LLC
This may come as a surprise to many, but there’s a lot to gain by registering your business as an LLC (limited liability company). For those who aren’t aware, LLC is a legal form of a firm that offers limited liability to the company owners. In plain language, registering as an LLC entitles you to some of the benefits offered to large organizations while maintaining many of the benefits of individual ownership.
To be specific, LLC companies can apply for tax breaks on professional development initiatives, S corporation status, personal property, and staff training and education. It’s also worth noting that changes to the corporate tax structure have reduced the flat rate charged to corporations, and LLCs (like sole proprietors) can claim 20 percent in the shape of deductions on earnings (of course, this is subject to special rules limitations).
5. Apply for a Home Office Deduction if You’re Eligible
If you’re running a business from home, claiming a home office deduction is one of the best ways to reduce your tax bill. Both homeowners and renters can apply for business tax savings, but there are certain regulations that need to be met. Firstly, the IRS says that the office room or space in your residence must be exclusively and regularly used for conducting business activities.
For example, if your wife uses the same room to watch television, you’ll not be eligible for a home office deduction. Also, it should be the core place of business operations. However, even if you conduct some business outside your house, you can still qualify by using your home office substantially and frequently to carry out business activities.
6. Don’t Skimp On Travel Deductions
If you’re traveling to an industry-related conference, you may be able to claim a business deduction for all your costs, including hotels, meals on the road, and airfare. Deductions also exist for costs that may not immediately come to mind, such as shipping items that you’d use at trade shows, the expense of using a fax machine, and any parking costs you incur.
However, the IRS has a criterion in place that business owners need to meet in order to qualify for travel-related deductions. Most importantly, you must keep yourself away from your local place of business for longer than a typical day’s work. It’s ideal to keep copies of receipts or any other travel-related expense documents. These will be vital in the event that you are audited.
Besides these six business tax saving tips, the best way to keep costs low is to file your taxes on time. The penalties levied by the IRS for filing your taxes late can be costly. Whether you’re holding off for the next year’s deadline or filing quarterly, you should begin streamlining your paperwork around December of each year. Make sure to note each of the deductions you may be eligible for and file paperwork in a timely manner.