There is a common misconception that everyone goes out of their way to minimize their tax burden. In reality, the vast majority of small business owners overpay their taxes as they fear egregiously punitive penalties stemming from an audit. As is often said, it is better to be safe rather than sorry. Let’s take a quick look at some tax tips that will help small business owners save money during tax season.
Sweat the Small Stuff: Receipts
Take a moment to think about everything your business spends money on. From staff lunches to business trips, office equipment, trade shows, conferences and beyond, you likely spend thousands or even tens of thousands of dollars on these common expenses. However, if your business is like most others, you are not taking full advantage of potential deductions. This is precisely why it is in your interest to keep all of your receipts.
Organize all of your receipts on a monthly basis and make copies just in case their ink fades. This way, if your business is audited, you will have evidence of expenses used toward deductions. Keep in mind, even some cash transactions qualify as deductions so maintain a detailed log along with receipts and present those documents to your tax accountant during tax season.
Don’t Overlook the Section 179 Property Deduction
Small businesses are eligible for deducting the entire amount of specific types of property as expenses, starting in the year when those properties were initially used. This deduction is referred to as Section
179 Property. Up to a maximum of $1,000,000 worth of eligible property belonging to the business can be deducted. Examples of eligible deductions are facilities used for business or research purposes, buildings in which livestock are stored and property used for production, transportation and manufacturing.
Depreciation Matters in the Context of Taxes
Your small business’s tax bill can be reduced all the more if you take full advantage of the qualified assets depreciation bonus. Qualified assets obtained and put into service after September 27, 2017 are eligible for this bonus depreciation. However, the prior rules of 50% bonus depreciation are still applicable to qualified assets obtained prior to September of 2017. Such assets must be bought new as opposed to used. The rule alterations permit full bonus expensing of qualified assets, regardless of whether they are new or used. However, the bonus depreciation will move down to 80% in 2023.
Take Advantage of Deductions for Your Home Office and Car Expenses
Even if you have an official business office away from home, you should still take advantage of the home office tax deduction. Keep detailed records of everything you spend toward the ongoing use of your home office. From internet service to home office supplies, mortgage interest payments, insurance and beyond, there are plenty of ways to reduce your tax bill through the home office deduction.
Even your auto expenses have the potential to be deducted wholly or partially from your tax bill. As long as the vehicle is used for work purposes, its mileage and other related costs can contribute toward tax mitigation. Consult with your tax accountant to determine whether the actual auto expenses or IRS standard mileage rate is the proper deduction for your small business.
Dispose of Your old Equipment After Careful Consideration
If your small business has equipment or other property that is no longer useful, don’t assume disposing of it in any old matter will suffice. Consult with your tax accountant to determine whether it is better to sell it as a capital loss or abandon it as an ordinary loss. Ordinary losses are fully deductible. The moral of the story is every small business owner should frame the disposal of property in the context of how it is classified in the tax code’s Section 1231.
Be Mindful of Carryovers
Certain deductions or credits might not be used in full in a single tax year. It is possible for these deductions or credits to carry over into subsequent years. Such items range from the home office deduction to net operating losses, capital losses, charitable contribution deductions and beyond. So be sure to keep track of these carryovers to ensure you take full advantage of them during tax time. Even if you don’t understand the manner in which carryovers are applied to taxes, your tax accountant will ensure you maximize their impact to keep your tax bill as low as possible.