Personal taxes can be complicated. Business taxes can be even more difficult. If you own a small business, tax time can be challenging. The livelihood of any company is at least partially dependent on its ability to minimize its tax liability, while meeting the requirements of the IRS.

While taxes are rarely enjoyable or interesting topic, they’re a part of any business owner’s life. Getting a handle your business taxes can increase your income and help you avoid legal issues.

Check out these tax tips that are helpful for any small business:

1. Keep your tax and financial documents for at least 7 years. If you’re ever audited, you’ll need those records. Any claims made at tax time require supporting documentation. Keeping good records is an excellent idea for any small business because it encourages organization. It is very difficult to reconstruct records at a later date.
   
   
2. Know your deadlines. It isn’t all about April 15^th. While most business entities can wait until “tax day,” C-corporations are required to file within 10 weeks after the fiscal year ends, which is normally December 31^st.
   
   
3. Understand your loans. The IRS doesn’t classify most business loans as income. But the interest paid on loans is generally a deductible expense. It’s important to have records regarding the use of any loans. It might be for equipment or to finance some other activity.
   
   
4. Know the different types of audits. There are several types of audits and some are more intimidating than others.
   
   
   1. Office audit: Generally this is a simple audit. You’ll be requested to report to your local IRS office to resolve some discrepancy.
      
      
   1. Correspondence audit: You’ll just be asked to send in a document via mail or fax.

• Field audit: These tend to be very thorough audits and they are conducted at your place of business.

• Criminal investigation audit: Consult your lawyer. You’re suspected of tax evasion.

• Pay your quarterly tax bill. This is a common mistake. If you have an employer, your taxes are regularly taken out of your paycheck. If you’re self-employed, you’re required to estimate your tax each quarter and pay it. Failure to pay this can result in a significant tax penalty.

• You might also end up with a bigger tax bill than you can handle in a single payment. Make a habit of setting aside a portion of your profit each month in anticipation of paying your quarterly taxes.

• Prepare early. The vast number of tax filers wait until the last minute. If you’re expecting a refund, this can be the worst time to file. The IRS is overwhelmed with all the tax returns that pour in. However, this can also be the best time to avoid an audit. Preparing your tax return early leaves you time to find any missing documents and answer any questions.
  
  
  • Get help. Depending on the complexity of your business’s finances, hiring an expert to prepare your tax return might be a good idea. In theory, the money you spend ought to result in a smaller tax burden. It’s also helpful if any legal issues arise.
    
    
  • Avoid using taxes collected from employee payroll to pay business expenses. This common practice upsets the IRS greatly. When you withhold taxes, send them to the IRS!

Taxes are a large expense for any business that shows a profit. It only makes sense to minimize that expense. Consult a tax professional if you have any questions or concerns regarding your business’s tax situation.

One of the most common trouble spots that business owner incur is how to treat vehicles for business purpose. Most business owners ask about deducting mileage and then also the payments on the vehicle, and are shocked to learn you can only do one or the other. Also, once you choose one method on that vehicle, you are locked in to that method with some exceptions. Knowing the proper way to deduct your vehicle expenses will not only save you money, but also from a potential audit.

Standard Mileage Deduction

For 2020, the standard mileage rate was reduced to 57.5 cents. In 2019, it was 58 cents.

It is called the standard mileage deduction because it takes the least amount of work to take this expense. Think of it as a catch all without having to prove all the expenses. Essentially, you need to keep track of your business miles for the year in a written log or app, and you are good to go. This can be used for purchased or leased cars as well. You can also deduct parking fees/tolls, interest you pay on a loan and any registration and taxes that are owed on the car. You cannot take depreciation on the car, gas, vehicle repairs, lease payments or anything else related to the car.

Actual Expenses Deduction

This deduction is just as it sounds, you can claim all the actual expenses you incur. You will still need to log your miles so that you can determine the business and personal use of the vehicle and you will also need to keep all your receipts. You can now deduct gas, repairs and all other expenses to your car. If you are financing it, you may take the depreciation of the vehicle and if leasing, you may now take the lease payments.

You can still deduct parking, interest and taxes on the car, but with this deduction, you can deduct everything else that is vehicle related. Even things like garage rent, insurance, etc can be taken now.

Which One is Better?

This is an impossible question to answer without knowing a person’s situation. In general, if a car is being used for light duty, such as just for visiting clients, then the standard mileage is generally the better way to go. If you are operating a large vehicle with poor gas mileage and high maintenance costs, then you will likely choose the actual expenses. Again, it all depends on your situation.

To figure out what is best for your business and to learn other ways to help maximize your tax write-offs, please schedule a consultation with us.

Attached here is the guide that I created and sent out to my clients so that they could understand the tax law a bit better. Please read over and feel free to ask any questions.

This is created for all my clients, whether they are my income tax clients in Hanover or my virtual tax clients from across the United States. Some of these principles also apply to my business tax clients here in Hanover and virtually, but it mostly covers personal income taxes.

If you have more specific questions, please contact Bryan Shearer, Accountant if in the Hanover area or virtually.