With just a few months remaining in 2014, it’s time to take advantage of as many tax credits and strategies as you can before the end of the year. Below we touch on some tips and strategies for you to consider.
Dianna Patton, CPA, CFP®, M.Tax, also weighs in on some of these topics and discusses some of the most common tax mistakes small businesses tend to make. Patton runs her own tax firm, Patton Tax Group, LLC. in Richmond, Virginia, and works extensively helping small businesses with their taxes.
Some Common Mistakes Small Businesses Make
Two common tax mistakes small business often make are failing to record all their mileage, especially when using a personal vehicle for business, and not saving all their cash receipts for the year. These may seem small, but a few dollars here and there can really add up, according to Patton.
“They forget when they go to the post office and spend a couple dollars on postage,” she said. “Even as a small business owner myself, I have to remember to put the receipts in an envelope marked “cash.”’
You have to find the strategies that work best for you that you will actually use to track these expenditures, whether they’re simple or complex, she explained. For mileage, you can get a free calendar at the beginning of the year and keep it in your car, and mark down the “who, what, where, when” on the appropriate dates, she said. Or you can purchase a notebook from Wal-Mart or a more expensive log book from an office supply store.
“If you don’t make it easy on yourself, you’re not going to do it. So pick a method you can use,” said Patton.
If you’ve saved all your receipts and documents, fall is a great time to start organizing them along with other records, she said. Make sure your books are up to date and accurate. This can also help save your accountant time and billable hours when tax season arrives.
In her 25 years as a tax professional, Patton says one of the biggest mistakes she sees small business owners make is “they try to wear too many hats…They try to save money by working their business all day and then come home at night and try to catch up on their finances.”
They might actually end up making more money in the end if they hired a professional to manage their finances and taxes, she explained.
Fall Is the Best Time to Contact Your Tax Professional
According to Patton, this is a great time of year to touch base with your accountant or tax professional if you have one. Not only can you discuss some of the strategies below to see if they’re a good fit for you business, but tax experts are less busy this time of year. It’s also a way to avoid “tax surprises” next spring, she said.
“In this economy, one of the things I’ve seen with a lot of small businesses is that they are tightening their belts,” said Patton. “So some are having more profit than in the past because they’ve become more efficient.” The problem is that they may not realize their profit is larger and could affect their taxes.
“It’s a whole lot easier to tell you in November to expect a tax bill of ‘X amount’ than to tell you in February,” she said.
Also, some things have to be done by the end of the year, and if you wait until too late in the year to contact your accountant or tax professional, they may not be able to squeeze you in.
Below are some strategies and tips Pallet Enterprise has put together based on information from the Small Business Administration and other resources. It is a good idea to discuss these strategies with your accountant or tax professional to see if they’re a good fit for your situation.
Maximize Deductions – Buy Equipment and Supplies
Small businesses can deduct expenses for a variety of capital equipment purchases made through the end of the year. Even if you don’t think you need any new equipment right now, it’s a good idea to review what you have to determine if any items could use upgrading. Look at items such as your manufacturing equipment, but also consider replacing items such as computers, furniture, business software and vehicles. You can also typically claim purchases of supplies such as paper, printer cartridges and other items.
In July, Congress passed a bill that would not only extend the $500,000 Section 179 deduction for small businesses, but makes the credit permanent. The Senate, however, has not yet voted on the bill. If the bill does not pass, the deduction will stay reverted to the current limit of $25,000.
According to Patton, Section 179 basically lets small business who use certain accounting methods claim the full price of a piece of equipment in the year of purchase, rather than have to claim the depreciation of the item over a period of several years. A computer for example is depreciated over five years.
Another consideration, according to Patton, is whether you can actually start using the equipment in 2014. “It has to be placed into service in order to get this deduction,” said Patton. Therefore, you can’t just go out and buy equipment the last week in December and then claim it on your taxes for this year.
Something else to take into account is what method of accounting you use for your business. If you are a cash-base business, then you only get to deduct the expense when you pay for it. While credit card and cash purchases can be claimed on taxes as of the date of purchase, items purchased using store’s credit account (not a credit card) can only be counted when the funds are paid to the store or business, not on the date of purchase.
“When I talk to my clients, I try to tell them don’t let the tax tail wag the dog,” said Patton. In other words, she advises them go ahead and make upgrades and purchase equipment and supplies at the end of the year that may be needed a short time down the road. “But don’t just throw money out the window.” In other words, don’t just buy something for tax reasons if you don’t really need it.
Other Key Strategies to Reduce Your Tax Burden
• Donate to Charity – With the holiday season around the corner, now is a great time to consider making a business charitable contribution. You can donate money and/or usable items such as clothing, toys, and other goods, and claim a deduction for the fair market value. Be sure to get proper documentation or a receipt for your records.
• Hire a Veteran – If you have open positions that need to be filled, consider hiring a returning or disabled veteran. This is not only a way to give back to those who’ve served and made sacrifices for our country, but your business can also earn a tax credit by hiring them. The Returning Heroes Tax Credit provides businesses that hire unemployed veterans with a maximum credit of $5,600 per veteran, and the Wounded Warriors Tax Credit offers businesses that hire veterans with service-connected disabilities with a maximum credit of $9,600 per veteran.
• Defer Income – If earning more this year will push your small business into a higher tax bracket, there are a couple of things you can do to remain in a lower tax bracket this year in December. Check with your accountant to see if either or both of the strategies below make sense for your business.
First of all, you can send out December bills late in the month so that you don’t receive payments until the beginning of 2015. Secondly, you can defer income by taking capital gains in 2015 instead of 2014. So ask your accountant if it makes sense to defer December payments until January to cut your tax bill.
Secondly, while you can’t defer income or wages for your employees,
you might consider delaying the payment of bonuses. If you usually give your employees a bonus at the end of the year, consider issuing the bonus at the beginning of the new year. If you operate on an accrual accounting basis, you can claim a deduction for the bonuses this year even though they aren’t actually paid until next year. The bonuses must be paid within 2.5 months of year-end.
• Make Pre-Payments – Just as your business might defer income to keep your profits lower for the year to remain in the lower tax bracket, you may also be able to make advance payments. This can lower your overall profits for the year by increasing your expenses. You can typically pre-pay for items like subscriptions, mortgages, insurance, and may also be able to pre-pay some vendors. Again, check with your accountant to make sure this strategy is right for your situation.
