Small business owners often wait until the last minute to start thinking about taxes. Get a jump on tax season to minimize your tax burden.
Getting an early start on your taxes can help you minimize your tax burden, increase deductions, and avoid the end of the year scramble.
1. Update Employee and Independent Contractor Information
If your small business works with independent contractors, who are not employees or an incorporated business, you will need to submit a 1099 form. 1099s are used to report any payments of $600 or more. Contact independent contractors to make sure that you have the most up-to-date contact information. You may submit a W-9 form, if you don’t have one on file, to request information like the business tax identification number and contact information.
Each employee should receive a W-2 form by January 31. To make sure you have updated contact information, request all employees log into your payroll system and update their information well before the end of the year.
2. Maximize Your End of the Year Deductions
As the end of the year approaches, take time to consider what steps you can take to minimize a large tax bill.
Purchase Necessary Equipment
Do you need new computer equipment or office furniture? The cost of new equipment may be deductible. Section 179 allows qualified small businesses to take a tax deduction of the full purchase price instead of depreciation on qualifying property like business equipment and supplies like computers or office furniture.
Contribute to a Qualified Charitable Organization
You can minimize your tax burden by donating cash or in-kind (property or equipment) to a qualified charitable organization, whether you use the cash or accrual method. Your deduction limits are based on your business’s organizational structure.
Year-End Employee Bonuses
Did your business have a successful year? Consider giving bonuses to outstanding employees before the end of the year. Bonuses given before the end of December can help minimize your tax burden.
Plan a Reasonable Holiday Party
Your holiday party expenses may be deductible if they meet certain criteria established by the IRS. The IRS may deduct 100% of your holiday party expenses if the event promotes employee goodwill and is limited to all employees, not related to the owner, and their spouses. No contractors, vendors, or business contacts are allowed to attend to qualify for the full deduction. Your event must be reasonable compared to your annual revenue and not considered extravagant. This means that the IRS may have a different standard of extravagance from Joe’s Pizzeria compared to Microsoft.
3. Start Gathering Documentation
To further minimize your tax burden, small business owners must have valid, well-organized documentation for all expenses and deductions. You may want to make copies or electronically scan paper and other hard-to-read receipts. Start collecting receipts and invoices for often overlooked items like cloud-based subscription services like Dropbox, domain names and web hosting, and online shopping services like Amazon Prime or big-box membership services like Costco, if used exclusively for your business. You may want to take the time to review business credit card accounts, current year bank statements, or review last year's tax returns to highlight any forgotten expenses. Find receipts for any paid professional services like an attorney, paid membership dues, or business-related publications. Gather the receipts for any conferences or trade shows you may have attended this year which include the event registration fee and related expenses like parking or toll fees.
Don’t wait until the end of December to start planning potential deductions or gathering documentation. Now is the time to launch an easy to understand filing system that will help you get documents and files to your tax professional and avoid scrambling to find receipts.
Disclaimer: All tax discussion on this website is included for general information only. It is not intended to be, nor should it be construed to be, legal or tax advice. Always contact a qualified tax professional to discuss your individual situation.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.