The money you make in your business is hard-earned. It’s the reward for all of the sales calls, difficult client deadlines, and customer support challenges. So it’s hard to give it up to anyone—least of all the government. Yet, taxes are a part of doing business in almost every country on earth. And we want you to focus on one thing: keeping as much of your money in your pocket as possible by taking advantage of every possible legal method of reducing your year-end tax bill.
This list isn’t intended to be exhaustive. And we really hope you take the steps to build out your financial team to include a CPA who can advise you on the specifics of your business. But we do want to point out a few misconceptions or less-frequently discussed tips that might help boost your bottom line this year.
Deductions to consider for your small business
Home Office
Though it’s a frequently misused—and therefore frequently IRS audited—deduction, anyone with a legitimate home office should in no way be dissuaded from taking this deduction. In order to be written off, your home office needs to be two things: regularly and exclusively used for business. The regular part is slightly ambiguous, but the exclusive part is fairly straightforward. It means that your office can’t be your dining room, your nursery, or any other area where non-business things are happening. But if you do have a space (it doesn’t have to have four walls and a door) that meets this criteria, you should be deducting a portion of your rent, utilities, mortgage interest, property taxes, etc. There is a newer streamlined method for calculating this deduction, but make sure you calculate it the “old” way as well. You can still use that amount if it’s bigger.
Travel expenses
These days it’s fairly common to see people mixing their travel for business and pleasure. That doesn’t mean you have to skip writing it off. Instead, you look at the percentage of time you spent working vs the entire trip and take that percentage off your costs. For example, if you went to New York for five days and had three days of solid meetings followed by two days with your friends, you would total everything including your airfare, hotels, ground transportation and meals, and multiply by (⅗) to get the amount you should deduct for the trip. But be sure you have itineraries and a calendar with your meetings listed to support your claim.
Year-end spending
It’s never a good idea to look at the cash in your bank and say, “If I don’t spend this before the year is out, I’m going to owe a bunch in taxes.” Since you only get a 15-35% reduction in your tax bill for every dollar you spend, you’ll be broke before you make a dent in your taxes. You should however look for two year-end opportunities. First, if you are approaching a tax bracket change (where you may suddenly owe 5-10% more of every dollar of profit just because you crossed a certain line) you may want to angle your spending to stay in the bracket of your choice. Second, if there’s money that’s planned to be spent early next year, you can always try to accelerate. Remember that even though you have to treat those as deferred expenses for financial statement purposes, taxes are filed on a cash basis.
Estimated payments
Not everyone is required to make estimated tax payments throughout the year, but for those of you who are, not making those payments in a timely fashion can end up costing you. The government will add interest to your year-end tax bill for all of the days each of those payments are late.
Donated inventory
If you are the kind of business that has inventory sitting on the books, it might be worth making some generous year-end donations. Why? If you let the inventory sit until it goes bad, you will be able to write it off at cost. But by donating it to a charity, you can write it off at cost plus 50% of markup. So a sweater that cost $15 to make and sells for $80 can be written off for ($15+½*(80-15))= $47.50. And who wouldn’t like to give out some sweaters when it’s cold outside?
Donated services
Donating inventory is great. But for service-based businesses, beware of nonprofits that offer you donation letters in exchange for doing pro-bono work. The fact is that—letter or not—the IRS doesn’t allow for donation of services, other than hard costs involved. So you may be able to write off the taxi ride and printing for your presentation, but the hours and hours of work that you didn’t bill for will go unrealized. Although that’s not to say you shouldn’t do it—just do it for reasons other than a write-off.
Small business healthcare credit
If you’re a small business owner and pay for a part of your employee’s health insurance, this is not one you want to pass up. It’s very easy to skip past this credit when doing your taxes, but even if you missed it, you can amend your last couple of returns to get the additional refund now. Since the rules for qualifying are fairly detailed, it’s best for you to use this simple Q&A guide.
Turn your taxes in on time
This may go without saying, but when you’re talking about legal ways to keep your taxes low, avoiding interest and penalties should definitely be on the list. The amounts of these penalties and interest will vary based on how much you owe and how late you are, but the bottom line is the same: don’t add unnecessary dollars to your tax bill because you couldn’t meet a deadline. P.S. An extension gives you extra time to file the return, not extra time to pay your taxes. Have your CPA help you estimate what you might owe and turn that in prior to the deadline to avoid paying interest.
It’s important to measure your performance, and there’s an easy way you can see how you’re doing on driving down your tax bill. Take the total amount you paid in taxes and divide it by your net income. By taking advantage of the points mentioned above—and all of the other tax breaks afforded to you—you can hopefully make that percentage shrink to a smaller and smaller number. Ask your EMyth Coach to help you track this metric. And ask your CPA for guidance when you need it. But be aware that just as different lawyers will interpret the law differently, different CPAs will vary slightly in their interpretations of tax law. Find someone who can explain things in a way that makes sense to you. At the end of the day, even though they sign your return, you are still responsible for supporting every number.
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