As a small business owner, you can literally live and die for your taxes. The taxes you pay on income earned throughout the year can consume up to 25 percent or more of your profit margins. Being smart about filing taxes can put more money in your pocket and make your business appear more profitable on paper.
Acquisitions and purchases to run the business
Wait until the end of the year to purchase office equipment and other supplies so that you can claim these items as a tax write-off. Buy new shipments of paper, office equipment, pens, notebooks and whatever else your business uses right now. It is also a good time to find sales of chairs, desks and office furniture.
Bill customers in January
At the end of the year, defer incoming payments for a few weeks until the new fiscal year begins. Especially the big payouts from your top customers. If you postpone them until the first week of January, that money will not be counted in taxes for the current year, but will have to be claimed the following year. This can be very valuable if you receive only a few large payments from one or two clients every quarter or every two years. Schedule payments with your taxes in mind.
Cancel returns
Write down your returns and never claim them as income. Any item that is returned and a refund has been issued counts as a loss against the income you receive. Make sure to track returns and refunds in your accounting software and review refunds and exchanges every six months. If you wait until the end of the year, the invoices for these reimbursements may be lost or missing.
Invest in energy efficiency
Look for energy efficiency credits as they can save you a lot of money on your taxes. The government supports energy savings by giving credit to businesses that buy green appliances. Even computers, printers, and water heaters (if it’s a home business) can qualify. Solar energy is the biggest green solution that generates deductions today. Search more and maximize whenever you can.
References: https://www.irs.gov/businesses/small/
What happens when a fiscal year is lost?
Every April the tax collector comes to get your check. As a small business owner, you must pay your income taxes each quarter and file a tax return by April 15. It’s always better to file a tax return late than not at all. If you don’t file your return, you will eventually have to file a replacement return and face penalties and interest – whether your failure to file was an accident or not.
Tax documents
Tax documents like 1099 forms are generated by your customers and vendors and sent to your business and the IRS. The IRS keeps these forms with your other tax documents. Failure to file a tax return when the IRS receives proof that you generated taxable income puts a red flag in the system.
Substitution statements
If you don’t file a return, the IRS will eventually generate a return on your behalf. You may think it’s a good deal to let someone else do the work – but the IRS may not favor your business with credits, expenses, and deductions, and it can lead to a higher tax burden. If you receive a substitute return from the IRS, file your own return to replace the substitute. You will continue to owe the penalties and interest on your tax debt.
Penalties and interest
The two most common penalties you face are failure to apply and failure to pay the fine. According to the IRS, the penalty for non-reporting is calculated at 5 percent of your monthly taxes, not to exceed 25 percent of your tax liability. The penalty for not paying is half of 1 percent of your total tax liability each month, not to exceed 25 percent of your total tax burden. If both penalties are assessed in the same month, the penalty for non-presentation is reduced by the penalty for non-payment for each month. After 60 days of no application, the minimum penalty is $ 135 or 100 percent of total taxes. Also, the IRS charges interest on your tax burden.
Payment process
After you file your back taxes – or the IRS does it for you – the collection process begins. The IRS offers installment payment plans to pay you back the tax burden in a specified period of time. If you don’t set up an installment plan or pay your bill, the IRS collection process can take your money. The IRS uses bank liens, liens, and federal property tax liens to collect the taxes you owe.
Additional consequences
Failure to file your tax return means you cannot get a tax refund. You have three years to file your tax return to get your refund back. Self-employed taxpayers who do not file their taxes do not receive credit for Social Security or disability benefits. Additionally, the IRS does not routinely process individuals who fail to file when they make an honest attempt to rectify the situation. Taxpayers who consistently fail to file their taxes without regard to the law can face criminal penalties.
Reference: IRS Haven’t filed a tax return? This is what needs to be done.
Tax deductions for the finance leasing industry
Leasing companies offer vehicles, equipment, and other assets to businesses and individuals who do not want to buy. These companies allow customers to use their products for a monthly fee. Leasing companies have a variety of tax deductions that are unique to their industry.
Loan interest paid
Leveraged leasing offers lessors a unique tax situation. In this type of leasing arrangement, the lessor borrows 80 percent of the money for a piece of equipment, and then leases that equipment to another company. This gives the lessor the cancellation of the loan interest payments, while receiving the equipment lease payments.
Equipment purchases
Leasing companies benefit greatly from Section 179 of the Tax Relief Act of 2010. This section allows for increased depreciation on equipment purchases. Leasing companies can take up to $ 500,000 in deductions and buy up to $ 2 million in equipment. Additionally, bonus depreciation increased to 100 percent on new equipment purchases.
Reference: IRS.gov: Schedule C
Do I need receipts for everything in a tax write-off?
The Internal Revenue Service allows you to deduct expenses that are ordinary and necessary for the operation of your business. However, if you are audited, you need to show receipts for these deductions. So keep receipts for everything you plan to cancel when you file your business taxes.
Types of deductions
You can only write off expenses that the IRS allows for business deductions. Some of the most common include office supplies, furniture, software, subscriptions, business debt interest, taxes, office space, utilities, employee pay, insurance, and auto mileage expenses for business, but not for cars. Travel back and forth. Capital expenditures, such as start-up costs and assets, are generally not deductible, but can be depreciated over the life of the asset.
Use of receipts
The only time you will need to show your physical tax receipts is if you are audited. In this situation, you will have to show a receipt for each cancellation or you will lose the cancellation and pay a penalty and interest.
However, you don’t have to submit the receipts when you file your tax return, nor do you always need them to figure your deductions. For example, you might have a business credit card that you only use for deductible business expenses, so you can only write off the amount that you paid on that card.
Obtaining receipts
Every time you make a purchase or pay a business related invoice, get a receipt for it. Whenever possible, do not make business and personal purchases in the same transaction. For example, if you order office supplies but also need a few boxes for personal storage at home, place these orders in separate transactions so you have a receipt showing only your business expenses.
If a receipt does not clearly show what you bought or how it will be used for your business, write it down on the receipt. For example, if you keep a receipt for a business lunch, write down the customer’s name and the purpose of the meeting.
Receipt storage
File receipts immediately in an organized system for easy tax filing. One of the best ways to store them is in an accordion folder labeled with expense categories, such as business meals, travel expenses, office supplies, furniture, and insurance. If your business is small, you should be able to get away with simply counting the receipts for each category at the end of the year.
With a larger business, you should record expenses in an account book on a regular basis to limit the amount of work you have to do at tax time.