Staying up-to-date on tax developments and changing laws is an important part of being a small business owner. While it may be tempting to avoid the headaches of tax season, you're better off staying focused and informed throughout the year so come tax time you can work more productively with your CPA or tax professional. By being aware of deductions, especially those that are often overlooked, you can ensure that you're saving the most money on your taxes each year. It can also lead to more informed discussions with your tax professional.
"Typically, I see businesses and their owners focused on what their businesses do – providing a service, creating a product, or selling a product," said Sam Hicks, a CPA with the California-based accounting firm Stern, Kory, Sreden and Morgan. "When they're tasked with focusing on something that can be very complicated for a week or two out of their year, it can be seen as a chore with the best method to completion being getting it done as quickly as possible. The rush this creates doesn't lead to a full understanding of potential tax breaks and strategies."
If you're working on your taxes and think you qualify for one or more of these deductions, make sure you discuss with your CPA the deductions your business can take advantage of.
[Related: Interested in tax software for your business? Check out our best picks for tax software for business]
One standard deduction that many business owners overlook – particularly freelancers or very small business owners – is deducting home-based expenses. This can apply to a range of expenses, like housing payments, Wi-Fi plans and even utilities. The amount of savings varies based on your situation but is usually paid on a percentage basis.
"Nothing in the internal revenue code prevents businesses from using a reasonable usage allocation method – meaning if a small business owner uses their internet 75 percent of the time for the business, 75 percent of the bill would be a reasonable deduction for the business; same with utilities, security systems and home upkeep," Hicks said.
According to Tom Wheelwright, CPA and author of Tax-Free Wealth, having a home office can extend your deductions to other areas as well. You may qualify for a higher deduction on your vehicle.
"While most business owners take some deductions for their car, they miss a lot, because they don't take a home office deduction. Since having a home office can eliminate the nondeductible commute. With your home office commute being 30 feet from the kitchen to work, many business owners find their automobile deduction increases by as much as double what it was previously," he said.
Planning for retirement
If you're a small business owner, don't overlook setting up a retirement plan for you and your employees because of your business's size. Setting it up right, while it will vary based on your business's needs, can be a viable financial option if you qualify for certain deductions.
"The deduction would come out based on the amount that's funded at the corporate level," said Scott Berger, a CPA with Florida-based accounting firm Kaufman Rossin. "Many small business owners just completely forget about it or they're afraid that they're going to have to fund too much for their employees and totally disregard it without actually investigating and seeing what the benefits are."
Do you employ your children?
Business owners who employ their children can save money by structuring their taxes to get a deduction. Small businesses can hire children as young as 12 to work for the business. As long as they're paid a proper wage, these kids can contribute to the family business. If you are "employing" some of your children, you can get a tax deduction on their earnings.
"In 2017, the standard deduction allowed for all single people, including children, is $6,350 – this means if a parent business owner is taxed at a 35 percent marginal tax rate and pays their child $6,300 for their work – work the parent may have had to do themselves – the tax burden of that $6,300 (35 percent time $6,300) shifts away from the parent to the child and with the wage amount being less than the annual standard deduction, the child wouldn't have taxable income," Hicks said.
Much like home-based businesses, some small business owners qualify for a tax benefit based on where they travel for their jobs. Going to a client's location or traveling other places for business are obvious miles, but Jeffrey Schneider, founder of SFS Tax Problem Solutions, said that business owners should try and log every work-related mile for the tax benefit.
"Many people remember to include miles to their clients or vendors. However, what about those trips to the office supply store, bank, post office? These miles add up," he said.
One area businesses can get a deduction on is legal fees and tax preparation software. If you're using software or working with a CPA on hiring your taxes, or have various other outstanding legal fees, you could qualify for a deduction. Michel Valbrun, CPA and founder of Wealth Warriors, said that some businesses qualify for legal-related deductions. In general, it could be possible to deduct fees you pay attorneys for tax-related work. This can also apply to tax prep software. This deduction, like many featured in this article, varies on a case-by-case basis. If you think you qualify for a deduction on legal or tax-related fees, it's definitely worth exploring this option with a tax professional.
It's important to stay on top of your taxes throughout the year. If you work with a tax professional, ask informed questions to ensure you're getting the most out of your filing each year. It's also important to consider accounting or tax software that can help you file, but if your business is large and complex, it's crucial to work with a CPA or tax professional.
Regardless of how you complete your taxes, make sure you're staying informed and on top of law changes. In the end, working with an accountant is the most beneficial to your business if you have good communication and can plan for a healthy financial future.
"We want to be their partners, and we want to communicate with [small businesses] on a regular basis," Berger said. "You go to the doctor for preventative maintenance, you should go to your accountant for preventative maintenance as well."