For small-business owners in the U.S., April brings with it a certain degree of extra anxiety and stress. The shifting tax landscape — from deductions to ever-changing rules — is seldom at rest and the chances to miss opportunities are many.
Zogby Analytics recently polled 400 U.S.-based accountants and found the biggest mistake small-business owners make is not keeping their financial records up-to-date, followed by a lack of understanding when it comes to their tax obligations — especially around deductions.
The first place to start is figuring out which form a small business needs to file. Most small business owners are classified as sole proprietors. In this case, they can report their business income and expenses on a Schedule C form and attach it to their personal income tax return. The deadline to file these forms is this Monday, April 15; let’s look at what owners need to know, changes this tax season that they’ll want to keep their eyes on, and some ways to steer clear of common mistakes.
1. Consider All Deductions within Reason
If a business recently upgraded with new hardware or software, some of these new tools may be eligible for deductions. Section 179 of Small Business Expensing allows owners to deduct the full purchase price of qualifying equipment and software up to $500,000. This is a 2013 tax extension, and it’s potentially on the chopping block for 2014.
For those filing home-office deductions, this year there is a simplified form that caps at $1,500. This isn’t a replacement of the traditional home-office form — taxpayers can still file the original way if home-office expenses exceed $1,500.
Some common deduction mistakes to avoid include:
– 43% of the accountants said that SMB owners over-deduct when it comes to income.
– 27% said that small-business employers misidentify their workforce along lines of employee and contractor states.
– Some 30% of owners tried to list a family vacation as a business trip.
Meanwhile, 15% cited pets and pet food as a deductible expense.
2. Be Aware of Changes to Healthcare and Payroll Taxes
Under the Patient Protection and Affordable Care Act, beginning in 2013, higher-income taxpayers must pay a 3.8% additional tax on Net Investment Income. Additionally, high-earners will incur an Additional Medicare Tax of 0.9% on wage and/or self-employment.
Business owners should also keep in mind that the American Taxpayer Relief Act did not extend the 2% break (2011–12) to the payroll tax.
3. Proactively Record Expenses: Establish and maintain even more accurate systems for storing receipts. Cloud-storage technologies offer a gamut of easy and affordable ways for SMBs to keep track of their expenses. One click with the camera on an iOS or Android device and bid adieu to piles of crumpled receipts.
4. Don’t Leave Money on the Table: Out-of-pocket expenses landed as the number one overlooked deduction followed by auto expenses, according to the survey. So track those miles, save those dinner receipts, and write off that iPhone 5 – it will all add up in the end.
Proactive Owners Win at Tax Time
In the end, what 72% of the accountants said is that they could do a better job of building good habits, correcting deductions problems, and helping owners file better returns if they could interact more with the business throughout the year.
Sure, that’s advice that’s squarely in an accountant’s best interest, but getting out of the habit of playing catch-up every March and April is undoubtedly a good thing as well.
The underlying message is this: get proactive and stay in touch with the changes and alterations to the tax rules as the year unfolds. The end result? Less panic and anxiety for business owners every spring.