As we enter tax season, many small business owners are wondering what they can do today to make tax season less stressful. To help them (and people like you) make this and next year’s filing process simpler and the return sweeter, we’ve answered the top five most frequently asked questions small business owners have when deliberating their annual financial strategy. The answers to these questions include tax tips you can't afford to miss!
The answers to these five questions can help make this year, and the following years, a bit easier on you (and your business' books) come tax time.
Although you’re probably most concerned with how much owning a small business is going to cost you in taxes, you should also be aware of how to report your income and deductions. How you do so depends on whether your business is classified as a Sole Proprietorship, Partnership, C Corporation, or S Corporation.
Each entity type is taxed differently, and its income may or may not be subject to self-employment tax. It's important to understand the advantages and the nuances of your business. We encourage you to talk to a certified public accountant (CPA) to ensure you remain compliant with the IRS while planning to reduce your tax liability.
(Want to be audit-proof? Read this post next for more tax tips)
Ordinary business and other necessary expenses are tax deductible, as well as a handful of expenses that are a little less “ordinary.” It’s probably simpler to list the expenses that are not tax deductible.
These include:
Federal taxes
Penalties
Bribes
Dues for entertainment facilities (country clubs, hunting lodges, etc.)
Other expenses which are personal in nature
Overall, tax-deductible business expenses vary depending on the industry in which your business operates. Consult your CPA for questions regarding expenses specific to your business to determine their deductibility.
We also have six year-end tax tips to keep on hand for next year in this post.
As a small business owner, you can usually deduct your health insurance premiums. But HOW you go about deducting them is important, which brings us to our next tax tip!
If you are eligible for health insurance coverage under your spouse's employer-sponsored health insurance plan, you can only deduct your premiums as an itemized deduction. Such a deduction is still subject to all the additional limitations related to itemized deductions, regardless of whether you actually participate in your spouse's insurance plan.
However, if you are not married or eligible for health insurance under their plan, you can list your health premiums "Above the Line." Generally, this results in a greater tax reduction. This is an important distinction—two partners in the same partnership may find themselves deducting health insurance premiums differently based on their respective personal circumstances.
Like health insurance, this is another complex topic. Simply put, if you plan carefully, contributions to retirement can result in significant tax savings each year. The rules are very specific for different types of retirement plans, and plans set up or administered incorrectly can trigger an immediate tax penalty. Therefore, it is always best to discuss your intentions with a CPA and even a Certified Financial Planner (CFP), to ensure you make the best decision possible when investing in your retirement.
(Learn about IRS documentation and what's required for your small business here)
This is an important question and you don’t have to wait until December or even January to find some answers. Each business is different, so asking a CPA and/or a business advisor for personalized help will save you the most money. They can help you develop a financial strategy perfectly tailored to your business.
There are often many options for your business when designing a tax strategy and speaking with a professional is the best way to make smart and informed business decisions.
At Two Roads, we provide a wide range of financial services, including bookkeeping, CFO advisory, and tax assistance. For more information on how we can better help you manage your company's finances, schedule some time to chat with us here.
Here are three more posts to read next:
This article was originally published in 2015, but has been updated in 2023 just for you!