Tax season is now underway, and businesses across the country are preparing to submit their financials to the IRS. If this is your first business tax return, you might be nervous about how much you owe the government. Fortunately, there are plenty of smart, simple and legal ways to reduce your tax liability.
Business News Daily spoke with tax experts to uncover some of the best strategies for lowering your business tax bill.
Know which deductions you can legally make
The IRS allows for a wide range of tax deductions that you can potentially use to your advantage.
"Many small business owners are unaware of deductions and are missing out on money that can be saved every year," said Gary Milkwick, chief product officer of 1800accountant.com.
Milkwick named a few of the most common business expenses owners can deduct from their taxes:
- Expenses and mileage for personal vehicles that are used for business.
- Cellphone bills, if the phones are primarily used for business
- Costs incurred to operate businesses from home (portion of the rent, utilities, etc.)
- Meal and entertainment expenses with existing or potential partners, employees, contractors and clients (meals and entertainment expenses are 50 percent tax deductible)
- Costs to purchase business equipment, such as computers, printers, monitors and phones
- Setting up and contributing to retirement plans
Make smart purchases and investments
If you're going to invest in new equipment or services for your business, the timing of those purchases can affect your tax liability for the current or next year, said Milkwick. While it's still early in the year, you may want to think ahead and plan out what you're willing to invest in before the end of 2017.
"If it's November and you're planning on purchasing equipment within the next several months for a business expansion, for example, it may make sense to accelerate the purchase of the equipment before the end of the year to get the tax deduction in the current year," he told Business News Daily. "Same goes for services. If it's towards the end of the year and you're planning on a large marketing campaign over the next several months, it may make sense to prepay for some of the costs to take the deduction in the current year."
Happen to have the spare cash to make bigger investments? Be sure to consider tax-friendly opportunities. For example, you can write off a significant portion of initial investments in areas like real estate and oil and gas, said Casey Minshew, COO of EnergyFunders.com.
"Oil and gas investments that pass through 'intangible drilling costs' help reduce an investors' taxable income, as they can take these costs as active deductions against their earned income," Minshew said. "This can generate up to a first-year return of 30 percent based on tax benefits alone, even before a drop of oil has been produced."
If you want to learn more, see this Charles Schwab article outlining which investment expenses are and aren't tax-deductible.
Understand what is and isn't taxable
Business owners often mistakenly think that all cash inflows are taxable income and all cash outflows are deductions, Milkwick said. In reality, the nature of the cash inflow or outflow determines its deductibility.
For example, he said, income from the sale of the business's goods or services is taxable. However, some common cash increases that aren't taxable to the company include bank loans, lines of credit and loans from the owner to the business.
"These [loans] are also not deductible to the owner until the business spends the money," Milkwick added.
If you're not sure about whether you can or should use these strategies, consult with your tax attorney or CPA.
Avoid an audit
While it makes good financial sense to explore all your options for reducing your tax bill, you need to be careful: If your deductions look suspicious to the IRS, the agency might select you for an audit.
The IRS has switched its focus from large corporations to smaller business entities like sole proprietors, LLCs, partnerships and S corps, said Jessie Seaman, senior managing attorney at Tax Defense Network. In other words, Seaman said, your business could be under even greater scrutiny than your bigger competitors are.
Seaman noted that the IRS commonly looks for certain types of business tax deductions — such as those for home offices; meals, travel and entertainment; vehicle use; and real estate losses — to make sure taxpayers are adhering to limits and regulations.
Similarly, Steven Aldrich, chief product officer of GoDaddy and former CEO of online accounting system Outright, reminded business owners to keep personal and business expenses separate. (The IRS looks for personal expenses reported as business expenses, he said.) And always report full, gross income before any fees, such as those for credit card processing, are taken out, he added.
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