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Expenses. Keep a daily diary or log of your expenses throughout the year. It will be less intimidating to prepare your return and easier to identify all legitimate business costs if you have a log that’s up-to-date and detailed.
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Deductions. One of the principal reasons small business owners pay more taxes than necessary is that they don’t take advantage of all of the deductions they’re legally allowed. Often that happens because they can’t prove they are qualified. The most common deductions for small business owners include entertainment, travel, meals, capital assets, home office and health insurance. Travel miles, meals and entertainment deductions require that you maintain a diary with daily entries that tie into receipts and other records.
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Traps. There’s no easy way to say this: A small business owner may do some things that are more likely to get IRS attention than others. For example, claiming deductions that exceed your income for more than one year is a definite red flag. The home office deduction, which is allowable only under specific circumstances, may be another red flag. That’s not to say you shouldn’t claim every deduction you’re entitled to claim, only that you should be especially careful when you do so
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Retirement. You must have earned income each tax year to qualify for a tax-deductible retirement plan. If you do, the funds paid into the retirement plan are deductible and they may also grow tax-free until retirement.
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Equipment. For tax years beginning in 2011, a small business may deduct up to $500,000 in equipment purchases as long as the business spends $2 million or less for equipment for the year. The cost of repairs may also be deductible even if the repair does not extend the useful life of the equipment.
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Payroll. One of the most common and costly tax-related problems for small business owners is that they use the payroll taxes withheld from employees to finance business operations. Not only does the IRS often go after a small business owner’s personal assets to collect the unpaid payroll taxes, but also it may attempt to assess significant penalties.
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Insurance: If you have health insurance coverage for your employees, check to see if you are eligible for the small business health care tax credit. The IRS website has a page describing the credit, eligibility requirements and how to claim it. Or, check with your local CPA.
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Veterans: An expanded tax credit is available to business owners who hire certain unemployed veterans. Don’t overlook the credit if you hired a qualified veteran who started work on or after Nov. 22, 2011 or you plan to hire one before Jan. 1, 2013. The IRS website has details.
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Contributions: Many small business owners donate goods or services to charitable organizations throughout the year. Be sure to get a valuation for any non-cash items your business donates to charity so you’ll have the records you need to support the deduction for your contributions.
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Help. If you are unsure about anything related to your tax obligations under the law, you should seek professional help from a certified public accountant. Meeting with your CPA quarterly to go over your specific situation will allow him or her to best advise you on what to do to keep your tax bill…and the stress over it…as low as possible.
About the AICPA
The American Institute of Certified Public Accountants (AICPA) is the world’s largest association representing the accounting profession, with nearly 377,000 members in 128 countries and a 125 year heritage of serving the public interest. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting.
The AICPA sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination and offers specialty credentials for CPAs who concentrate on personal financial planning, fraud and forensics, business valuation and information technology. Through a joint venture with the Chartered Institute of Management Accountants (CIMA), it has established the Chartered Global Management Accountant (CGMA) designation to elevate management accounting globally.
