Year-end tax strategies
Understanding your business taxes can help you get the most from your tax return.
To reduce tax liabilities and gain momentum for the year to come, it's essential to be on top of your business taxes and financial affairs before the fiscal year ends. Sit down before the filing deadline to assess your overall tax situation, gather the documents you'll need to reference, and identify the tax deductions and credits you qualify for.
Keeping well-organized records can save you time and reduce errors when tax-time rolls around. Start by dividing most, if not all, of your financial records into four categories: papers that you need to keep for one calendar year or less; ones to destroy when you no longer own the items they cover; tax records (for at least seven years); and papers to keep forever.
When tax time approaches, having a high level of organization can save you a lot of time and costly errors. In fact, IRS studies show that for most small business owners, it's poor records not dishonesty that causes them to incur fines and penalties for failure to comply with their tax reporting obligations.
Accounting programs and digital spreadsheets can offer an affordable and simple way to keep track of the financial data you'll use during tax time and maximize your tax refund. Avoid spending hours inputting large amounts of data at one time by creating a regular schedule for making updates to the spreadsheet on a daily, weekly or monthly basis.
Current vs. capital expenses
Knowing the difference between current and capital expenses can help you understand what can be deducted from your business's total income and when. Current expenses can be deducted in the year you make a purchase, and include expenses such as office supplies and utilities. Capital expenses are expenditures for things that will help you generate future revenue such as a desk or a car, and may require tax deductions to be spread out over a period of years (with the exception of Section 179).
Know the breaks
Knowing what business credits and deductions are applicable to your business is key. Federal and state business tax laws are constantly evolving, so do your research or better yet, hire a tax professional who specializes in serving small businesses.
When trying to identify tax deductions on your own, it's important to be aware that the IRS is concerned with personal expenses being claimed as business ones. Your business expenses should qualify as "ordinary and necessary" according to the tax code.
Making charitable donations to worthy causes may also mean more tax deductions for your business. Contributions made to certain tax-exempt organizations may count as tax deductions on your federal income tax return. Proactive planning can allow you to make the most from your generosity. For example, you could cut back on excess inventory by donating it to charity — and increase your tax refund.
If you use your vehicle for business purposes, you have two options for claiming tax deductions: using actual expenses, which requires you to account for all of your driving-related expenses; and using a standard mileage rate, which allows you to deduct a specific amount per mile driven in addition to the cost of tolls and parking. If you run your business out of your home, you may be able to claim tax deductions there, as well. However, your home must be your principal place of business, where you meet clients or customers or where you perform administrative or management tasks.
Hire a pro
It may be helpful to seek professional advice on your business taxes to make sure you’ve got it all right. Make sure your tax professional is an enrolled agent, a certified public accountant or a tax attorney.
In addition to vetting your advisor's experience and credentials, make sure he or she is a strong communicator who is able to explain things clearly. Even when you rely on the advice of a tax professional, you're still responsible for all of your business's tax-related actions, so it's critical that you have a solid grasp of how your taxes are being managed.
Here are several resources to help you prepare for tax season:
Learn more about end-of-year accounting processes.