In life, it's said that two things are certain – death and taxes. But in business there's only one certainty: taxes. Tax obligations go hand-in-hand with running a business. From the federal government on down to city hall, you need to be aware of which taxes your business needs to pay, how much in taxes you owe, and when you need to file. Make a mistake and your tax bill grows. At the same time, if you plan ahead, take the right available deductions, and prepare your tax returns properly, you can save on the amount of taxes your business must pay.
Taxes may be the least favorite topic for small business owners, but it's one of the most important. The steps you take before the end of the tax year can help your business save money almost immediately. At the same time, the beginning of the next tax year is a good time to review whether you are maximizing your deductions and maybe even get a second opinion on additional ways you can save on taxes. Knowing how to minimize the amount of taxes you pay means that you get to keep more of the money you earn. Failing to properly manage your taxes means that your business might wind up in trouble.
"You could sink your business," says Richard M. Colombik, an attorney and CPA based in Itasca, Ill., who has served as the State of Illinois Bar's liaison to the Internal Revenue Service (IRS). "It might put you in a position where your profitability is so small that it is not worth the effort that an entrepreneur has to put in to run their own company. They might be better off getting a job working for someone else."
The following pages will detail the different types of business taxes you need to be aware of, how to determine your deductions, and tips for how to save on taxes so your business -- and you -- can ultimately benefit.
Types of Business Taxes
There are a variety of taxes for business. "Understand your responsibilities to help you meet them on a timely basis and avoid costly penalties for failing to act on time," advises Barbara Weltman, a tax an business attorney and author of J.K. Lasser's Tax Deductions for Small Business and the Big Ideas for Small Business newsletter. Here is a rundown:
Taking the Right Deductions
Set up books and records
Even though you may use a casual approach to recordkeeping for your personal taxes, you can't do this for business. "The tax law specifically requires certain records in order to take deductions," Weltman says. "Without these records, legitimate expenditures may not be deductible." Here's what you need to comply with tax rules:
Make smart tax elections
Under the tax law, most expenses incurred in business are deductible, while most income is taxable (there are, of course, some exceptions). The tax law gives you options on when and to what extent you claim certain deductions or report income. Here are some examples cited by Weltman:
Keep current with law changes
The tax law is constantly changing, with major legislation, court cases, and IRS rulings appearing frequently throughout the year. Many of these developments present positive tax opportunities -- if you know they exist and you act on time. Often, waiting until the annual meeting with your accountant may be too late to learn about and act on these opportunities.
For example, starting in 2008, Congress passed a measure as part of the Economic Stimulus Act of 2008 that let businesses deduct the full price of qualifying equipment purchased or financed during that tax year. Usually, under Section 179 of the IRS code, businesses that buy qualifying equipment can write off those expenses in smaller increments spread out over a series of years. But the new measure allowed businesses to deduct the full purchase price for the year that they bought it in, a move that could let a business pay lower taxes in the current year and still buy or lease more equipment to write off in subsequent years. In addition, Congress raised the dollar limits on these deductions. The limits were $125,000 per item not to exceed $500,000. They were raised to $250,000 per deduction, not to exceed $800,000 for the total amount purchase. Congress extended this under the American Recovery and Reinvestment Act of 2009.
Another example came following Hurricanes Katrina, Rita, and Wilma in 2005. A number of tax-saving breaks were created to run for a short time. The charitable contribution limitation was raised for individuals and corporations, but only through the end of 2005.
Colombik says that a lot of new tax provisions aren't properly utilized by small and mid-sized businesses because they or their paid tax preparers aren't aware of the deductions. "No one knows everything about taxation because they keep changing the law," he says. "The tax law is so incredibly broad based. I don't believe that anyone could be an expert in every single area. It would take a lifetime just to be an expert on retirement plans."
When businesses ask their tax preparers if there is anything else they can do to save on taxes, most often the response is, "No. You're doing everything you can." Colombik says that isn't necessarily truthful. You're taking all the deductions that your tax preparer knows about and that's why you might want to get a second opinion. He recommends finding a dual degree professional from the American Association of Attorney CPAs, who can understand both tax planning and the law.
"A closely held company that is profitable should seek an outside tax planning firm just to take a second look at how they are structured and how they are treating all transactions," Colombik says. "That doesn't mean their accountant is bad or their attorney is bad. It's a way for someone to come in and recommend possible alternatives." Those alternatives can potentially help your business save a bundle.
How to Save on Taxes
One of the first questions you need to determine is whether you need to enlist the help of a professional to handle your business taxes -- and help you plan in advance so that you can take advantage of certain deductions. "I get asked frequently how to determine when you need to talk to a professional and there are two ways to gear it," Colombik says. "One way is to look at the tax and calculate whether it will cost me less to talk to a professional than to pay my tax bill. The other way is to consider that if you're not paying a lot of tax in that area now, but you know you are going to be in the future, you can find out if there is a way to plan properly."
Common ways to save on taxes
You can take advantage of some standard tax rules that can save your business money. Here are some examples:
American Association of Attorney-Certified Public Accountants
The only association in the country whose members are professionals dually qualified as both attorneys and CPAs.
Federation of Tax Administrators
The Federation of Tax Administrators provides services to state tax authorities and administrators including research and information exchange, training, and intergovernmental and interstate coordination.
Free Management Library
A library of publications regarding taxes for small, for-profit businesses.
Internal Revenue Service
View the government's Small Business and Self-Employed One Stop Resource on federal taxes. Find an A to Z index of topics for small business, business news, links to forms and publications, and guidance on tax-related responsibilities for businesses with employees
Small Business Administration
Link to a variety of business tax topics, including business taxes, e-file for business and self-employed individuals, state and local taxes, and employment taxes.
State and Local Government on the Net
Access a directory of state, county and city government websites to find information about state income taxes and state and local sales taxes.
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