Ah, tax season. I think it is safe to say that most people do not look forward to this time of year. Hopefully, these tips specific to U.S.-based small business owners will help you feel cool and confident about the upcoming deadlines. Note that they apply to the 2017 tax year (not 2018).
1. Know your legal structure.
Many self-employed individuals operate as a sole proprietorship with no formal, separate legal entity. Or they may opt for a single member LLC, which is considered a “disregarded entity” for income tax purposes unless an election is made to be taxed as a Corporation. In either case, your net business income (all revenue less tax deductions) will be reported on Schedule C of Federal Form 1040, your individual income tax return. The deadline for 2017 Form 1040 is April 17, 2018 but can be extended to October 15th. If you want to hire an outside tax preparer, begin looking now … several Certified Public Accountants (CPAs) and Enrolled Agents (EAs) adhere to an earlier, internal deadline for new client relationships.
If your business is organized as a C Corporation, S Corporation, or Partnership, a separate tax filing is required. The regular federal filing deadline for 2017 calendar year returns is March 15, 2018 but can be extended to September 15th. Tax filings for these entities are more complicated, so it is recommended that you hire a CPA with experience preparing these returns. Establish a relationship now if you don’t already have one with a reputable accountant.
2. Get organized.
Regardless of legal ownership, get all tax data in one place. If you use a bookkeeping program like QuickBooks or Xero, ensure your 2017 records are updated and in order. Income and withdrawals should be classified appropriately. If you don’t know how to classify a transaction, bring it to your accountant’s attention with a simple “Unidentified Expense” or “Ask my Accountant” category.
At SV CPA Services, we use ProConnect Tax Online to prepare and file tax returns. Fortunately, that software integrates with QuickBooks Online. If we oversee or have access to a client’s QuickBooks Online file, we can more efficiently prepare the business tax return. Find out if your tax preparer has a similar tech integration – it may lower your fee!
3. Deduct up to $5,000 of start-up costs.
Was 2017 your first year in business? If so, you can deduct up to $5,000 of organizational and start-up costs. Any amount exceeding $5,000 should be capitalized and amortized.
4. Understand the home office deduction.
Rent payments for business leases are clearly deductible, but what if your primary office is a section of your home? The key is regular and exclusive use of the home office. Under the simplified method, multiply the square footage of your home office space (maximum 300 square feet) by $5. Therefore, the max deduction under this method is $1,500. The regular, more complex method considers the percentage of your home dedicated to an office. Consult this IRS guide for additional guidance.
5. Write-off meals.
There is usually confusion surrounding business meals. If you are the sole owner & employee or are treating a client to a meal, you’ll only be able to deduct half the cost of the business meal. If you are an employer and pay for a team to lunch or dinner, you can deduct the full cost of the meal since it's morale-building for the employees.
6. Be cognizant of overlooked deductions.
Auto, health insurance, interest on small-business loans, payroll taxes, office furniture, and marketing are just a few of the available tax deductions for small businesses. Many of these expenses, when personally incurred by employees, are not deductible. In other words, it pays to be a business owner! For the 2018 tax year and beyond, the Tax Cuts and Jobs Act provides additional deductions to business owners.
Tracking business mileage separate from personal mileage is essential to maximize an auto deduction. It would be too difficult to explain each tax deduction in detail here, so consult a general guide like this one from Fundera.
Even when you hire an accountant to assist with tax compliance, you assume ultimate responsibility for tax filings. When in doubt, consult a tax professional with the expertise to maximize your deductions. If you don’t have a relationship with a reliable CPA now and are interested in working together, please contact me for an initial, complimentary consultation.
All the best,
Deborah L. Meyer, CPA/PFS, CFP®
Owner, SV CPA Services