To most small business owners, tax time signals the dreaded month(s) of sorting through expenses, deciphering the complexities of the tax code and, well, wishing that a tax elf could whisk away the stress of filing annual returns.
As the founder of oldest and largest bookkeeping service in New York City, I understand the stress associated with filing taxes firsthand. Both as a business owner and as a trusted financial guide for my clients (the small businesses we support the entire year in anticipation of tax time), I know how overwhelming taxes can be.
Inching closer to that April 15 deadline, here are some key takeaways for small business owners and entrepreneurs seeking a little bit of guidance. Of course, I suggest that you direct all of your tax questions to your CPA, but these are some of the issues that I have encountered through my bookkeeping service over the years.
How does the fiscal cliff legislation affect me?
The legislation that squeaked by right before the so-called fiscal cliff had a couple of important impacts on small businesses. First, it set higher rates on several taxes that affect small-business owners, while giving new life to some helpful credits and deductions. Here are a few of the key changes:
● Payroll tax: A two year reduction in payroll tax expired: This left many business owners having to dock their own and their employees’ pay, by an extra two percentage points beginning Jan. 1.
● Medicare tax: High income owners will be affected by an increase in medicare tax rates, thanks to Obamacare . This may imply an increase in withholding or estimated-tax payments. See more on the tax implication of the affordable care act in our blog post.
● Section 179 deduction increase: The deduction allows expenditures on capital items like fax machines, factory equipment or any other tangible good acquired for the conduct of business to be written off immediately rather than depreciated gradually. The credit limit has been raised to $500,000 from $125,000, applying to 2012 and 2013 alike.
● Research Tax Credit: Varying tax credits for research and innovation have been revived, both for large tech companies and smaller startups.
● The Work Opportunities credit: This tax credit offers assistance for hiring military veterans, workers coming off government assistance, and ex-felons. The credit available ranges from $2,400 to $9,600 per qualified employee, with no limit on the number of qualified individuals an employer can hire. (Before last year, the credit had eliminated credits for all categories of credits save for veterans).
What other credits and deductions might I have missed?
I see it all of the time with my clients — they are busy or overwhelmed and miss tracking an important expense that could translate as a deduction at tax time. Of course none of my clients have this problem — but a recent study by The Hartford Insurance Company found in it Small Business Success Study, that only 64% of small business owners take full advantage of small business tax incentives and 37% don’t even know what those tax incentives are. Here are a couple of the big ones listed by the Hartford Group to keep in mind as you continue your tax preparation process.
● Business Travel: If your business requires you to travel, whether visiting clients, or checking on a job site, travel expenses such as airfare, hotel stays, trade conventions, meals while traveling, and laundry may be eligible deductions.
● Employees’ Pay and Benefits: You can generally deduct the pay you give your employees for the services they perform and other compensation such as vacation allowances, bonuses, commissions, and fringe benefits like health and life insurance.
● Rent & Utilities: If you lease the space you use for your business, you may be able to deduct some or all of the rent paid to your landlord. In addition, your business’s utility bills such as electric, gas, water, and phone service may also be deductible.
● Insurance: Don’t forget that nearly all business insurance premiums are deductible. Think worker’s comp, commercial property insurance, liability insurance, commercial auto insurance, etc.
● Sandy Losses: Seize the opportunity, New Yorkers! If your business was affected by Hurricane Sandy, you may be eligible to take a deduction on uninsured property losses your business incurred due to the disaster.
Again, this is not a comprehensive list of the various credits and changes in the tax code. It’s meant to act as a list to either confirm what you have been doing or to jumpstart those of you who have been procrastinating. Remember to contact your CPA with specific tax questions and work with a reputable bookkeeping firm year round to catch up or stay current — ultimately maximizing your savings during tax time.