Tax season is coming, however, and it’s time to start thinking about your taxes.
If you do some tax planning before the end of the year, you’ll be able to file an accurate tax return and make your payments on time. Here are some important tax issues that small business owners should consider:
Documents
If your documentation isn’t organized, it’s difficult to prepare an accurate tax return and to complete your tax filings on time. Here are some tips to organize your tax-related documents:
- Assign expenses: Whenever you spend money, assign the expense to a specific account in your accounting system. Avoid posting expenses to a “miscellaneous” account, because those expenses will have to be reviewed again at tax time. Don’t fall into this bad habit.
- Cloud computing: Paper files can easily become disorganized- or lost- so back up all of your data on the cloud. There are dozens of tools you can use to scan and save receipts and other documents online. Cloud computing ensures that you can access your files to prepare your tax return.
- Software: Use accounting software to post your transactions, so that the files can be electronically sent to your tax accountant. Alternatively, if you decide to prepare the return yourself, use tax software.
All of these tips will make it easier to generate your tax return, so implement these steps now.
Lower Tax Rates
The recent tax law changes lowered the income tax rate on C corporations (C Corps) from rates as high as 35% to a flat 21% tax rate.
C Corps are subject to double taxation because profits are taxed on the corporate tax return, and on the tax return of the owner.
Here’s an example: a corporation files a tax return and pays taxes on profit. The owners can retain profits for use in the business, or pay shareholders a cash dividend. If a dividend is paid, the dividend income is added to the shareholder’s personal tax return. The owner, in this example, is also a shareholder.
Some small business owners operate as C Corps, so check with your accountant to verify your company’s business structure, and if the lower tax rate applies to you.
Are You a Passthrough?
The new tax law allows many passthrough entities to deduct 20% of their qualifying income before computing their tax liability.
If you don’t operate as a C Corp, your business is probably a pass-through entity, meaning that company profits and losses flow directly to the owner’s personal tax return. Sole proprietorship, partnerships, and many other businesses are referred to as pass-through entities.
Assume, for example, that your share of a partnership’s profit is $10,000. The partnership files a tax return, and the $10,000 is added to your income on your personal tax return.
Now, a word of caution.
The rules related to this deduction are complex, particularly the definition of “qualifying income”. It’s important that you meet with an accountant, who can determine if these new laws reduce your business tax liability.
Buying Assets
The new tax law also created an incentive for companies that purchase machinery, equipment, and other assets for business use. In some cases, your company can deduct 100% of the purchase price of the asset in the year of purchase.
Assume, for example, that you purchase a $10,000 piece of equipment in 2018, and that the old tax laws required your to depreciate $2,000 of the asset’s cost each year for five years. Depreciation is the expense you recognize as an asset is used, and depreciation expense is typically posted over multiple years.
New law tax allows you to expense the entire $10,000 cost of the equipment in 2018, the year of purchase. This much higher deduction amount lowers your tax bill.
Again, there are restrictions, including a limit on how long this law will be in effect, so talk with an accountant.
What About Entertainment?
The deduction for business-related entertainment cost has been eliminated, which may increase your tax bill.
This was a common deduction for many companies, and this change will impact a number of small businesses. If you take a customer to a show, a sporting event, or to a round of golf, the cost is no longer deductible.
Now, this change does not impact many other business-related costs. Businesses can still deduct the cost of meals during business travel, for example. Find a tax accountant who is familiar with the changes in the deductions, so that you know where you stand.
Self-Employment Tax
There’s a great of confusion about the self-employment tax, and many business owners don’t deduct the proper amount of self-employment taxes.
Employees pay their share of Social Security and Medicare taxes through payroll withholdings, and the dollar amounts of the withholdings are reported on the W-2 form. The employer pays a portion of the tax also, and the employer deducts the taxes paid as a business expense. For 2018, the employer and the worker each pay a 7.65% tax.
If you’re self-employed, you pay both the employer and employee portion, and then deduct the employer portion on your personal tax return.
The self-employment tax can be a big deduction on your return, so it’s important to get the number right. Ask an accountant to verify that your deduction amount is correct.
Getting Taxes Paid
Many business owners pay their tax liability using estimated payments, and the amount of each payment can be difficult to compute.
Your profits may vary greatly during the year, and that makes the estimated payment calculation hard to pin down. If you’re a retailer, for example, you may earn the vast majority of your profits in the last six weeks of the year.
Work with an accountant to determine how to estimate your tax payments, so that you can pay the amount required and avoid penalties.
Extending?
Filing for an extension to pay your taxes later does not change your tax payment due date.
April 15th, 2019 is the due date for filing a personal tax return. If you request an extension to file your return later, your tax liability is still owed on April 15th.
The reason that many people ask for an extension of time is that their tax situation is more complicated than in past years. However, you should be making estimated payments each quarter if you’re a business owner, or paying your tax liability through withholdings on your wages.
An accountant can help you plan so that you can pay your entire tax liability by the deadline.
Take Action Now
You’re sprinting to the finish of your business year, thinking about taxes may feel like something you can put off until later.
Don’t fall into that trap.
Take action now to make tax time easier. Collect and file records carefully, and reach out to an accountant now, so that you understand the recent tax law changes.
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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