Tax time is one of the least-liked seasons for business owners, especially if you can't afford the armies of accountants that help save larger companies a bundle. And it's getting more complicated every year, even for the experts, thanks to the mounting gridlock in Washington. Congress waited until December--almost a full year after many bits of tax code had expired at the end of 2013--to take up the issue of retroactively renewing these so-called tax extenders. Since several of these deductions and credits benefit small businesses, this delay means you're probably facing a lot of last-minute scrambling to figure out how much you owe; even your tax software or accountant may be perplexed.
But all of that scrambling could be worth it. If you pay attention to the fine print, you could have reasons to celebrate this spring--tens of thousands of dollars' worth of reasons, in some cases. Just ask Gregory Raiz, co-founder of Boston-based app company Raizlabs, which spent three years overpaying the IRS while developing more than 100 mobile apps. Then, in 2013, a CPA friend of Raiz's office manager told him that the company probably qualified for the research and development tax credit. After filing amended tax returns for 2010, 2011, and 2012, "we got $30,000 back for the three years," Raiz says. "We didn't realize it was a credit we could take. Now we want to take advantage of it every year." Between the tax extenders and incentives from the health care overhaul, look for several other tax breaks coming out of Washington that could help your business this season. Keep track of them all with our guide to lightening your tax load.
1. Boost employee benefits
Yes, they can be expensive at first. But if you pay for employee health insurance, give transit benefits, or offer a 401(k) matching contribution, you can write off those costs. For 2014, some small businesses can also qualify for a special health insurance credit, of up to 50 percent of what they paid for employee health insurance premiums if those plans were purchased through the exchanges. That credit is an incentive tied to the Affordable Care Act, intended to increase health insurance coverage by lowering the cost of offering it. But it's a limited-time offer for small businesses--good for two years, max.
2. Donate excess inventory
Donations in kind never go out of style--giving away your unwanted merchandise can help others while alleviating your tax bill. Lisa Spain, the owner of Cotton Club Collection, a Houston-based women's clothing and jewelry boutique, learned this from her semiretired CPA father, who taught her to get rid of any inventory that doesn't move during the end-of-season sales. "We start our markdowns at 25 percent. After it goes to 75 percent off, then we donate," Spain says. All told, she estimates she can write off some $50,000 worth of merchandise a year.
In-kind clearinghouses like Good360 and NAEIR make it easy to get unwanted merchandise off your hands and to the people or nonprofits that need it most. The tax rules are more favorable for C corporations, which can generally write off larger amounts for donated items than the owners of S corporations and partnerships can. If you missed the boat in 2014, plan ahead: Make any donations by the end of this year to claim them next tax season.
3. Help local economies
There has long been a patchwork of incentives for doing business in troubled cities (think Detroit; Baltimore; Gary, Indiana) and needy rural areas. If you're located in a federally designated empowerment zone, check out the tax benefits. The main one, assuming the rules are extended, is a wage credit for hiring employees who live in such zones. But make sure the credit is worth the time it takes to slog through the paperwork, especially if you're doing it on your own. "Anytime you're dealing with government incentives where you need to get certifications, it's difficult and cumbersome," says Scott Berger of accounting firm Kaufman Rossin. Still, for up to $3,000 per employee in those zones, sometimes it's worth it to jump through the hoops.
Extra Specials for Brand-New Startups
If your business launched last year, make sure you take startup-cost deductions
When Jeff Stevenson started the Santa Rosa, California-based VinoPro seven years ago, he wrote off everything he could. "The startup costs are extraordinary," he says. There were software and hardware costs, plus incorporation and legal fees. As a venture capitalist married to an accountant, Stevenson had an edge in understanding the power of financial planning. "Be creative, and understand the rules of the game before you play," he says.
The game starts as soon as you have an idea. Even before opening the doors, you'll probably spend on market research or travel to meet potential customers. Under the tax rules, you can expense up to $5,000 of those costs and amortize the rest over 15 years--a much better deal than the standard tax treatment.
One common mistake: skimping on upfront costs and paying for it later. Stevenson learned that the hard way: He didn't hire an attorney to vet the name he originally chose for his company--Provino--only to discover that an Italian restaurant had the same name and was suing him for trademark infringement. Stevenson changed the name and regrets not spending the money on the lawyer at the outset: "I could've written it off in the beginning instead of spending $15,000 on a lawsuit."
It can be good to be a smaller business at tax time. Besides certain credits you qualify for, other advantages can help you get your share of the large deduction pie.
1% vs. 15.8%
The audit odds favor small companies. Corporations with assets under $10 million had a slim chance of being examined in 2013, while bigger corporations were more likely to be audited, according to the Internal Revenue Service.
2.2 million vs. 4.6 million
C corps filed half as many tax returns in fiscal 2013 as S corps. C corps qualify for more write-offs and lower tax rates, but their owners get taxed twice, on the company's net income and on what they receive as shareholders. Owners of S corps pay the taxes just on their own returns. If you're small and incorporating your business, it probably makes sense to file for S status.
The value of total corporate deductions in 2011 was up more than 35 percent from 2001, due to inflation and increased business revenue. $27.1 trillion is enough to buy 803 million new cars at the average price ($33,750), or 2.5 new cars for every American.