How to Reduce Your Small Business Tax Bill
Heads up: this article is only relevant for U.S. businesses.
In the lead up to filing your taxes, you’ll probably start wondering how you can reduce your tax bill. To help, we compiled a list of questions to ask your accountant that’s designed to help you do just that.
Cover these topics the next time you meet with your CPA or tax accountant, and determine if there are ways you can proactively reduce the taxes your small business owes for the year.
What business expenses can I deduct?
A good accountant will be able to identify every deductible expense and tax break available to your business.
This list of small business tax deductions also offers a great overview of deductible expenses commonly available to sole proprietors and small businesses.
Are my business expenses partially deductible?
Not all business costs are fully deductible. Expenses used for personal and business purposes are considered partially deductible. The nature of your business will determine which of your expenses fall into the latter category.
Common partially deductible expenses include the home office deduction, phone, internet, and business travel.
When it comes to partially deductible expenses, you can only claim the portion of the expense based on how much you’ve used the deductible for business purposes. For example, if you use your cell phone 50% of the time for business calls, you can claim 50% of your total phone bill cost as a business expense on your tax return.
Hold on to all receipts and documentation related to partially deductible expenses, and work with your accountant to determine the best way to maximize and claim these expenses.
Did any tax regulation changes affect my business?
Sometimes changes to tax regulations will benefit your business. Other times, they will not. For example, in 2014 the IRS introduced a new, simplified way of calculating the home office deduction. At the same time, a range of tax breaks that were beneficial to small businesses were discontinued in 2014.
Ask your accountant if there have been any changes to tax regulations that affect your business and, if so, check if there’s a way to leverage the changes to your advantage.
How does the legal structure of my business affect tax filing?
You may be subject to different tax requirements depending on the structure of your business. For instance, LLCs, partnerships, and s corporations are legally required to maintain separate bank accounts for their personal and business expenses. Even though sole proprietors are not legally required to maintain separate bank accounts for personal and business expenses, we strongly encourage it.
Ask your accountant to clarify what (if any) tax requirements are unique to your business’ legal structure. You should also ask them if changing to a new business structure will help you get a better tax return.
Can I deduct the cost of my health insurance?
If you’re self-employed, you can deduct the cost of your health insurance plan as an adjustment to income as long as the plan is under your name.
However, if you are eligible to be covered by your spouse’s employer’s medical plan, you cannot deduct the cost of your health insurance as a business expense. This rule applies even if you opt to not be covered by your spouse’s employer’s medical insurance.
This deduction can be confusing. Consult with your accountant and check the IRS regulations concerning medical and dental expenses before claiming it on your tax return.
Can I deduct my retirement plan contributions?
Based on your specific retirement savings plan, contributing to an Individual Retirement Account can reduce your taxable income for the year and these contributions are tax deductible. Keep in mind that there are limits on plan contributions depending on the type of plan you have.
How should I handle tax forms for my employees and independent contractors?
Knowing how to classify your workers as employees or independent contractors will help you understand the different tax laws and tax forms required for each type of worker. For example, for independent contractors you will need to file a Form 1099 and for employees you will need to file a Form W2.
If you’re ever unsure about how to classify a worker, double check with your accountant. Getting the classification right can help to avoid an audit and unnecessary penalties; the IRS is constantly on the lookout for businesses who dodge Social Security and Medicare taxes by misclassifying employees as independent contractors.
What paperwork do I need to keep throughout the year?
If you ended this tax year with disorganized paperwork and poorly kept financial records, start fresh in the new year.
Well-kept records can help you avoid an audit. They can also help you legally claim the maximum level of deductions available to your business.
The nature of your business will determine what you need to keep on file, so ask your accountant what paperwork you should hold onto throughout 2016.
If you’re unsure about how to organize your paperwork, check out our guide to small business recordkeeping.
What can I do now to save on my taxes next year?
As you prepare to file your tax return, the last thing you want to think about is doing your taxes all over again next year. However, there are bound to be a few things you can start doing right now to save on your 2016 taxes.
Ask your accountant if there are ways to structure your finances, diversify your business, change your business structure, or leverage any available deductions and tax breaks, to get a better tax return in 2016.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.