Taxes are stressful for everyone, but for business owners that stress escalates to a whole new level. Keeping meticulous track of all your expenses and revenue throughout the year culminates in a mess of paperwork and year-end decisions that may leave you vulnerable to a tax audit. Put in that perspective, taxes seem like a nightmare, but if planned for and executed thoughtfully, they can actually be advantageous for your business.
If you’re worried about the looming taxes for your business, make sure to implement these six tax strategies to save you time, money, and most importantly, stress.
1. Deduct everything you can
This is one of the most obvious tax tips, but it’s also one of the most important. When it comes time to prepare your taxes, make sure you report every deductible expense you can. Every dollar you deduct is another dollar of revenue you’ve earned throughout the year that you no longer have to pay taxes on. Many companies save thousands of dollars every year just by maximizing the deductions they report.
Most people realize the most obvious types of deductions—anything that’s necessary to keep your business running. They might deduct office expenses such as furniture and supplies, since those are often obvious and expensive costs. However, the number of potential deductions available for businesses is staggering. Here are just a few of the expenses that are tax deductible.
- Mileage used for trips on behalf of your business; so be sure to keep track of your business miles.
- Any education you’ve pursued for the purpose of advancing your career or building your business (including education programs you’ve paid for an employee to attend).
- Losses you’ve taken over the course of the year.
- Expenses you’ve accrued on business trips. And consider this: The government considers it a business trip as long as more than 50 percent of the trip was for business purposes. You could theoretically take a mini vacation after spending a few days meeting with clients, and deduct all your expenses.
2. Offer fringe benefits instead of salary raises to reduce tax burdens
At the end of the year, instead of giving your employees a direct salary raise, consider giving them increased pay in the form of new fringe benefits, such as new insurance plans. Doing so will keep your employees happy and feeling rewarded, and at the same time alleviate your total tax burden.
3. Keep your personal and business expenses separate
This is an essential tip that many new entrepreneurs commonly neglect. If you’ve started a business using some of your own funds, you might come to view your business and personal finances as interchangeable. After all, a loss for the company will end up being a personal loss, and vice versa.
However, it’s vitally important that you keep track of your personal and business finances separately throughout the year. Differentiate your expenses by using a personal credit card and a separate business credit card, and only use the appropriate card to pay for your expenses. Switching back and forth indiscriminately can muddy the waters and make it extremely difficult to tally your expenses at the end of the year.
4. Keep track of everything rigorously throughout the year
Do this yourself, and encourage your employees to do the same
on your behalf. Keep track of everything—purchase orders, incoming and outgoing invoices, payroll, and any receipts for any business-related purchases—throughout the entire year. Missing a deduction is certainly a risk, but the greater risk is making a claim on your tax submission that cannot be supported with documentation.
Accordingly, it’s a good idea to keep everything on file for at least seven years. This will protect you if you’re faced with an audit.
5. Donate your unused inventory instead of storing it
If your company produces materials throughout the year and you wind up with a surplus, it can be tempting to store excess inventory. However, storing it can cost you money or storage space in your facility, and inventory often depreciates the longer it’s stored.
Instead, consider donating your inventory to charity. Charitable donations are all tax deductible, so consider making a cash donation to offset some of your tax costs. Just keep in mind that if you donate more than $250 in cash, you’ll need proof of the donation (usually in the form of a canceled check). And if you donate more than $500 worth of inventory, the documentation requirements become complex. You also can’t deduct any time you’ve spent volunteering.
6. Pay attention to deadlines
Most people recognize April 15 as the looming deadline for completing tax returns. However, for businesses, April 15 is only one of several different deadlines that need to be taken into account. For example:
For S-corporations and unincorporated entities, annual returns are due on April 15 of any given year. However, C-corporations must file their annual returns two-and-a-half months after the end of their fiscal year.
- Estimated taxes, which are paid by many types of companies, are due a total of four times throughout the year—April 15, June 15, September 15, and January 15.
- Sales taxes are due on a quarterly or monthly basis, depending on the requirements of your state.
- Employee taxes, which are withheld from your employees’ paychecks, are due weekly, monthly, or quarterly, again depending on the requirements of your state.
A Note on Tax Audits
If you’re a new business owner and fretting over the possibility of getting audited, relax. There are several different types of tax audits, and not all are frightening or threatening. For example, the IRS could initiate a correspondence audit, which is a simple request for an additional piece of information or a document in order to verify an item on your tax return. Office audits are similar, and simply require an in-person meeting to clear up any unanswered questions. Field audits are more rigorous and in-depth, but criminal investigation audits are truly scary.
You’ll only be subjected to a criminal investigation audit if the IRS has a reason to believe that you have purposefully attempted to evade tax payments. As long as you aren’t engaging in criminal activity and you’re keeping decent records of your finances, audits should be of no concern to you.
Don’t let the fear of taxes get the better of you. Taxes are a natural, if stressful, part of business ownership. Once you’ve spent a few years pulling all the information together, you’ll grow accustomed to the process, and you’ll make up for any mistakes you’ve made in the past. For most business owners, hiring a knowledgeable staff that includes financial advisers and accountants can mitigate the stress of tax preparation, and position you for fewer mistakes along the way. If you can’t afford such staff, keep track of everything the best you can and focus on accuracy in your reporting.