Are you preparing now for tax-season success in the spring? Our latest podcast episode tackles a ton of tax-related questions for small businesses so you can stress less over the next few months.
Podcast host Dennis Zink teamed up with Burt Seither, SCORE mentor and vice president at 1-800-Accountant, for expert tax advice.
Starting and growth both require attention
If you’re just starting a business, Seither says now’s the perfect time to think about your business structure. While it doesn’t cost anything to set up a sole proprietorship, this entity is taxed very heavily. “It can leave you scratching your head at the end of the year, saying ‘What happened to all my money?’” he said.
An LLC or S-corp may be a better option for you. Seither doesn’t advocate for a one-size-fits-all approach, but notes the simplicity of maintaining an LLC, which as a hybrid entity doesn’t come with an inherent tax structure. That means you get to choose which set of tax forms -- sole proprietor or corporation -- you use at the end of the year.
You need to choose within 75 days of forming your LLC by making an entity classification election. But you miss the window -- Seither said a lot of people don’t know about it -- you can make that classification between January and March of the following year. Once you decide on a method of taxation, you must maintain that method for at least five years.
Consult with an attorney or other professional to determine the best filing option for you.
For the veteran business owner, remember that there are initial investments and losses are normal for the first few years of a business. “It doesn’t mean you’re not successful or you’re not making money” Seither said. Don’t forget that you’re probably reinvesting a lot of your revenue into your business to help it grow.
Tax-time red flags
Seither offered a number of red flags the IRS is watching out for in your tax filings.
- While some business expenses can be deducted immediately, some pieces of equipment may depreciate over time and be deducted over the course of a few years. Talk to your accountant or other professional before making a large purchase for your business.
- Seither advises against abusing “meals and entertainment” deductions. For a new business owner, it can be fun to put a business lunch or outing on your card and write it off. But you can only deduct 50 percent of these social meetings. Seither recommends writing details of the meeting or event on the back of the receipt that you file away, on paper or electronically, for use at the end of the year.
- If you bank electronically or pay for most expenses on a company card, remember that bank and credit card statements are not enough documentation for the IRS if you get audited. Err on the side of having more information than less, Seither noted, by retaining itemized receipts alongside your monthly statements and accounting software records.
“Pick and choose your deductions wisely and understand not only the benefits of writing off or claiming a deduction, but also the potential consequences.” Seither said.
Above all: Partner with a professional, whether a CPA, accountant, or enrolled agent, so you have a trusted person to call on when you have a question or concern. “Don’t view the money you’re paying that [professional] as an expense,” Seither said. “View it as an investment.”