Small Business Tax Tips
Managing taxes represents a year-round process for small business owners requiring diligent recordkeeping, strategic expense tracking, tax credit utilization, and compliance filing. Implementing knowledgeable tax planning reduces liabilities while maintaining full legal compliance.
Choose the Right Business Structure
The business legal structure chosen when first forming a company determines how business income gets taxed. Common options include:
- Simplest structure with pass-through taxation
- No distinction between business and owner
- Income passed through to owner’s personal tax return
- Pass-through structure for two or more co-owners
- Profits/losses passed through to partners’ personal tax returns
- Pass-through structure with liability protection
- Income passed through avoiding corporate double taxation
- Must follow strict corporation rules
- Separate entity from owners with limited liability
- Subject to corporate income taxes on profits
- Owners also owe taxes on dividends personally
- Hybrid offering corporation limited liability
- Choice of pass-through single or corporate double taxation
- Operational flexibility over stricter S corps
Analyze your situation and projected business model to select the optimal structure based on taxation preferences, desired liability protection, and needed operational flexibility.
Track Income and Expenses Diligently
Thoroughly tracking all business earnings and expenses establishes the supporting details needed when filing annual taxes.
- Use accounting software or spreadsheets to log income and expenses. Capture everything.
- Organize expense documentation like receipts and service invoices in an orderly system.
- Note purposes, allowability rules, and totals for taxes. Record sales tax obligations.
- Track employee or contractor payments, payroll tax liabilities, and 1099-MISC forms.
- Conduct self-audits verifying financial consistency, especially for cash businesses.
Comprehensive records prove deductions if ever audited while minimizing tax liabilities through compliant write-offs.
Maximize Small Business Tax Deductions
Business deductions reduce taxable income. Fully utilize available write-offs like:
- Startup costs – deduct up to $5,000 in startup expenses.
- Business use of home – deduct home office space and utilities based on usage percentage.
- Vehicle mileage – deduct mileage driven for business up to IRS standard mileage rate.
- Travel, meals and entertainment – deduct costs at 50% for business purposes.
- Inventory – deduct costs of goods purchased for sale.
- Supplies and resources – deduct products and services used in business activities.
- Health insurance – deduct premiums and costs for small business owners and employees.
- Equipment and assets – deduct portion annually through depreciation.
- Retirement plan contributions – deduct employer plan funding through 401(k), SIMPLE IRA, SEP IRA.
Take Advantage of Tax Credits
Beyond deductions, specialized small business tax credits reduce actual taxes owed dollar-for-dollar. Common options include:
- Research and development credit
- Work Opportunity tax credit for hiring target groups
- Energy efficient commercial buildings credit
- Disabled employee credit
- Credit for employer childcare payments
Study detailed compliance rules to qualify for these incentives. The savings add up for businesses pursuing eligible activities and investments anyway.
Make Quarterly Estimated Payments
Businesses must make quarterly estimated tax payments toward their annual income tax and self-employment tax liabilities. Payments to the IRS and state agencies are due by April 15, June 15, September 15 and January 15.
Calculate estimated amounts due on net income. Failure to make sufficient estimated payments triggers underpayment penalties. If projecting lower income or losses, adjust payments downward to avoid penalties yet still meet eventual tax liabilities.
Review S Corporation Reasonable Compensation
S corporations allow shareholders performing services to take distributions while only payroll taxes are paid on reasonable compensation amounts. Compensation must be carefully set and documented.
Factors determining reasonable compensation levels include experience, duties, hours worked, internal pay equity, market rates and company size.
Unsupported low compensation risks IRS reclassification of distributions as wages subject to additional employment taxes. Set reasonable pay defensibly.
Choose Your Tax Year-End
Businesses may use a non-calendar fiscal year as their tax year-end based on preferences for income and expense timing recognition.
For example, retailers often use January 31 yearends to avoid holiday income and expenses splitting tax years. Review sales seasonality and set optimal filing periods.
Once established, continue using the same tax year-end consistently. Notify the IRS if needing to make changes to your fiscal yearend filing cycle.
Hire a Quality Tax Practitioner
Partnering with a knowledgeable small business accountant and CPA brings tax expertise the owner lacks while providing independent advice.
Verify credentials like active licensed status and subject matter experience. Ask other business owners for referrals. Search CPA review sites but read critically.
Expect to pay fees for tax prep and expert planning but make back the costs through reduced liabilities and elevated confidence in compliance. A strong tax practitioner relationship is well worth the investment.
Set Aside Reserves for Tax Payments
Avoid financial scramble come tax time by proactively setting aside a portion of income regularly to cover upcoming tax bills. Consider opening dedicated business savings accounts or money market funds earmarked just for taxes.
Project both quarterly estimated payments and annual total liabilities to determine amounts to reserve. Keep updated on business income fluctuations and adjust reserves accordingly.
Consider prepaying the full annual projected tax amount early from reserves to maximize interest earnings. IRS overpayments get refunded after filing.
Incorporate Family Tax Planning
Smart coordination of family and business taxes presents planning opportunities through gifting, estate strategies, employing family members, and spreading income across lower tax brackets.
Discuss goals like transitioning ownership and assets to children with your tax advisor to create integrated plans leveraging business entities, trust structures, and gifting exemptions.
Consider employing spouses and children in age-appropriate roles. Document fair pay aligned with duties and time worked. This income can face lower marginal tax rates under individual lower brackets.
Maintain Impeccable Records
Retain detailed supporting records on income, expenses, accounting methods, payments, tax elections, and filings prepared. Keep records readily accessible for at least 7 years.
Physical receipts, mileage logs, inventory records, bank statements, and other verifiable evidence proves legitimate business deductions if ever audited. Sloppy support risks denied deductions.
Choose a records storage system allowing easy access to review or respond to agency inquiries timely. Scanning paper documentation protects against physical loss.
Tax rules for small business owners shift frequently requiring diligent planning and compliance efforts year-round. Implementing sound documentation practices, monitoring tax changes, and working closely with experienced tax advisors allows entrepreneurs to minimize legal liabilities while maximizing income. Treat small business taxes as an integrated strategic function, beyond just regulatory paperwork. The tax and financial benefits over time make proactive planning well worth the effort.