Tax day can be a dizzying experience for taxpayers, full of paperwork to gather and complicated tax rules to master.
That goes double for small-business owners, who have a completely separate set of challenges. NerdWallet surveyed financial advisors who work with small businesses to find out the top things small-business owners should be thinking about at this time of year.
Take advantage of depreciation
Under new IRS rules, if small businesses buy something for under $500, they can expense it. That’s a “big deal” for small businesses because it allows them to immediately write off small expenses related to improvements rather than having to depreciate those expenses over a period of years, says Craig Smalley, an Orlando, Florida-based tax expert.
“They have to claim ‘safe harbor’ on their tax return and have to have an accounting policy for depreciation in order to take advantage of this,” he says. “They have to have someone write the accounting policy. If they don’t claim safe harbor, they lose it.”
Offer a company retirement plan
“We see many small businesses that could take advantage of offering a company retirement plan, or who aren’t taking advantage of plans they currently offer,” says Ryan Neff, a retirement planner in Columbus, Ohio. “These plans can help owners lower their taxable income and also help them save for retirement.”
Owners who offer a 401(k) can contribute $18,000 as an individual, then can make employer contributions up to 25% of their company’s total compensation, Neff says. “When properly designed, the majority of the employer contribution will go to the owner’s 401(k) account(s). This means an owner could save $53,000, and if over age 50, an additional $6,000 as a catch-up contribution.”
Kansas City, Missouri-based financial planner Mathew Dahlberg counsels business owners to consider setting up a small-business retirement plan such as a SEP IRA (Simplified Employee Pension-IRA). The setup and funding deadline is the due date of the tax return for the SEP including extensions, he says (other plans have different deadlines).
“Also, very importantly, the setup costs are minuscule and the contributions, while they must be the same percentage to each eligible employee, are completely discretionary from year to year,” he says.
The last and arguably best reason to set up such a plan, Dahlberg says, is that the business may be able to take a small-business pension setup tax credit, which can cover 50% of the costs (up to $1,000 in costs) for up to three years, should the business qualify.
Talk to your accountant
The small-business owner’s biggest mistake as the tax deadline nears is “not engaging their tax professional in the conversation,” says Wan McCormick, a financial advisor in Fairfax, Virginia.
“The 2014 tax year is a year of changes, with the small business health care tax credit last updated in February. Small-business owners should inform their tax professional how their business has evolved and what they envision for their personal finance and business in the coming year so that the tax professional can advise the owner on any changes needed and educate the owner on future opportunities, such as deductions eligible.”
Brooklyn-based financial advisor Lori Dietzler says getting a good tax preparer is paramount. “Make sure they are honest, answer your questions, and understand your unique tax situation, such as freelancer income, Airbnb rental income, etc.,” she says. “I see too many clients who are being audited, their former accountant is in jail, and they owe back taxes with interest and penalties. Look at your taxes and make sure the information is accurate.”
Dietzler says basic organization and keeping track of income and expenses is crucial to avoid tax confusion.
“Some people use the envelope method, where they put receipts in envelopes for each expense category. Then, at the end of the year, they total up each envelope for income and expense category totals,” Dietzler says. “Others use spreadsheets or a Web/mobile app and update it throughout the year. Whatever the method, make sure you choose a system that doesn’t frustrate you at the end of the year when you need to total up your income and expense categories.”
Choice of entity
“Revisit the type of business entity your tax or legal advisors may have recommended you do business as and be sure it is still the best choice to help you meet both your business and personal goals,” says Jeff Vistica, a Carlsbad, California-based financial advisor. “Each entity comes with its own pros and cons. Consider how simple the entity will be to manage, what liability and protection it may provide, and how practical it may be to help you with tax planning. For example, an S corporation allows you some flexibility in determining how and when to receive income, while an LLC comes with ease of setup and maintenance, but it may also leave you subject to higher self-employment taxes.”
If you’re a small-business owner with tax questions, be sure to visit NerdWallet’s Ask an Advisor page. You can get free answers to your tax-related and other questions from certified financial planners, accountants and other financial professionals.
For more information about starting, growing and funding a small business, visit NerdWallet’s Small Business Guide.
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