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The best way to maximize your tax return is to take advantage of tax credits and tax deductions. If you do that, you’re more likely to get a refund on your small business taxes. This is good news for small business owners, who often feel as though every other payment they make is to the IRS or their state department of revenue.
Many taxpayers who are not business owners deliberately have more tax than necessary withheld from their paychecks in order to get a large refund in the spring. While getting a sizable refund right as holiday bills are coming due is nice, there are more effective ways to use your money. Especially for business owners, overpaying estimated taxes just to get a refund is not the best use of your cash. Plus, in general, a C-corporation is the only type of business entity that’s eligible for a business tax refund.
Here, we’ll cover the business deductions and tax credits you should take note of in order to maximize your tax return.
While we know we shouldn’t commingle business and personal funds, most business owners make at least an occasional company purchase using their personal bank account or credit card.
Take a bit of time to review your personal bank and credit card statements each month to help you identify business expenses you might otherwise miss. If your PayPal account is tied to one of your personal accounts, review your PayPal activity for business purchases. Also double-check for recurring subscription fees, which may have posted to your personal accounts.
Your bookkeeper or accountant will know how to record these expenses in your books so that they can be reflected on your tax return as a business expense. If possible, make sure you save the receipts for the purchases or a paper trail showing that they were used for business reasons.
A friend once told me she didn’t bother to track her business mileage because it was more trouble than it was worth. I asked her how much she drove for business. Her estimate was around 200 miles per week. At the current standard mileage rate of $0.535/mile (in 2017), 200 business miles per week would equate to $5,350 in business tax deductions (assuming my friend took two weeks off during the course of the year)! That is a sizable business deduction and could be the difference between owing taxes and receiving a nice refund.
A number of smartphone apps can help you track your business mileage and automatically update your mileage logs. Even if you have kept paper logs up to this point, take the time to update your records so that you can claim this expense on your business tax return. There are two options for deducting business mileage. The first is to take the standard per-mile deduction rate, which the IRS adjusts each year. In contrast, you can claim deductions for the actual expenses associated with business use of your car (e.g. parking fees, tolls, fuel, etc.). For more business owners, the standard deduction works out to be more beneficial.
Running up expenses on unnecessary purchases in order to save money on taxes is not a good tax strategy. In most cases, the tax savings are not worth the cash flow crunch. However, if you have adequate cash flow, prepaying expenses for the upcoming year can be an effective way to make sure you get more money back on your tax refund as long as you are a cash-basis taxpayer (and most small businesses are).
Some expenses you might want to consider prepaying are professional membership dues, insurance expenses, and software service or support plans. Prepaying these costs can often result in sizeable cost savings on these expenses in addition to minimizing your taxable net income for the year.
Again, only consider this option if you have adequate cash flow in your business. On average, each dollar a small business owner spends on a business expense results in about $0.30 in tax savings. If you run your bank account balance down too low in order to avoid taxes and then have to borrow money to cover your expenses, your tax savings will soon be decimated by interest fees.
There are a number of tax credits available to businesses, and these aren’t all limited to large corporations. Tax credits are even better than deductions because they slash money from tax bill. $1 of tax credits means you can subtract $1 from your tax bill. Deductions, in contrast, lower your taxable income.
These are some of the tax credits available to small businesses:
This just scratches the surface. There are many more tax credits available to small businesses. Taking the time to learn about tax credits your business might be eligible for is a great way to make sure you receive the most money back on your tax refund. Your tax pro is a great resource—ask them about any credits you might be entitled to take, either for the current year or future years!
The best tax strategies let you retain the greatest amount of your money. While you won’t have access to these funds right away, maxing out your retirement plan contributions is a great way to shelter your money from taxes while making sure you will be provided for in later years. Contributions that you make to a 401(k) retirement account or Simple Individual Retirement Account (IRA) are pre-tax, meaning that the money is taxed only when you make withdrawals later.
And don’t forget your employees! The amount your company matches for retirement contributions is also a qualified business expense under most circumstances. The tax deductibility of your retirement plan contributions depends on your investment instruments, so check with your investment advisor or accountant before employing this strategy.
Like the business mileage deduction, the home office deduction is a frequently forgotten way to maximize your tax refund. In addition to an allowance for the square footage of your office space, you might be able to claim a portion of your homeowners insurance, utility expenses, and depreciation of your home as business expenses.
In order to qualify, your home office must be used exclusively for business purposes, so you won’t be able to deduct the square footage of your living room even if you work from your sofa on the weekends.
The home office deduction is a common one, but not the only deduction by far. There are several other common deductions that you are entitled to take as a business owner. For instance, expenses while traveling for business are deductible. These include airfare, transportation, lodging, and meals. If you dine regularly with clients, those expenses are also deductible. Don’t forget the deductions for business use of a vehicle as well. Most “necessary and ordinary” expenses in the course of business can be deducted.
Bonuses, gifts and awards, and the annual company picnic not only promote goodwill with your employees, but they are also legitimate tax deductions. The rules for these, as well as numerous other incentives, can be tricky, though, and some incentives are taxable to your employees. If you want to maximize your tax refund while simultaneously building your reputation as a great employer, review this IRS publication to determine which incentives you want to provide to your team.
Before closing your books for the year, take a survey of your outstanding accounts receivable and determine if anyone who owes your company money is unlikely to pay. As long as you took reasonable steps to collect the debt, the IRS lets you write this off as bad debt. If the customer does end up paying you, you would simply account for the income in the following year’s tax return.
The Section 179 deduction for equipment can provide big tax savings for small business owners. Currently, this provision lets you deduct up to $1 million on each piece of equipment that you purchase or lease. You can take the deduction all at once, instead of slowly depreciating equipment over time. The Section 179 deduction is available for office furniture, machinery, off-the-shelf software, and more. You can spend a maximum of $2.5 million on equipment for the year, before the deduction starts to phase out.
While you definitely don’t want to change your business structure at the last minute, making sure you have the right business structure is important. The tax laws differ substantially for different types of business entities. For example, pass-through entities, such as S-corps, sole proprietorships, and general partnerships can claim a 20% deduction of business income. C-corps can’t take such a deduction and pay a flat 21% corporate tax rate. The structure that’s best for you depends on many factors, and your accountant and lawyer can help you walk through the different considerations.
Do you really want to spend a beautiful spring weekend poring over tax documents and tinkering with tax filing software? Certified public accountants who specialize in taxation, enrolled agents, and other tax professionals spend a good portion of each year studying changes in the tax code and learning about new tactics to save their clients money on their taxes. And they can usually prepare a small business tax return in a fraction of the time it takes a non-tax pro.
While you should be aware of the basics of the tax code and tax credits available to your business, spending hours trying to decipher complex tax issues and navigating tax return software is not the best use of your time. Use the services of a tax professional to minimize your tax burden (and maximize your tax refund). Bonus: The amount you pay to your tax preparer to prepare your business tax return is a legitimate business deduction!
Large tax refunds are a pleasant surprise, but they are not common for small businesses. Only C-corps are eligible to receive business tax refunds. Getting a refund could also indicate you could use some tax planning or even cash management coaching. Deliberately overpaying your taxes to get a large refund is essentially giving the government an interest-free loan, when you could instead use that money to grow your business, save for your retirement, or invest in new opportunities. Similarly, running up a bunch of unnecessary expenses in order to save money on taxes is also a poor use of your cash.
While no one likes to pay taxes, owing taxes—or not getting a large refund—indicates that you have properly managed your business finances and have a profitable business as well. Your accountant can help you form a smart strategy that makes sure you’ll pay as little tax as possible while also managing your business’ cash as responsibly as possible. Smart strategies such as these trump a large tax refund every time.