It may be easy to start a small business, but it may not be that easy to run your business smoothly if you are not aware of the taxes you have to pay. You will be liable to pay different taxes as a company, for the products you manufacture and the services you offer. If you default in paying your taxes, you will face unnecessary legal issues, which will have a disastrous impact on your business growth. The tax structure varies from state to state, and it is important to know what kind of taxes is applicable to your business in the region you operate from.
As a small business owner, it is important that you have a proper planning and maintain correct records of your expenses and transactions. This helps you in making tax payments hassle-free. Also, seek advice from a tax consultant, who will help you in handling taxes for your business.
Here are Top 10 Tax Tips for Small Businesses by Tax Expert Mike D’Avolio, who is also one of Intuit’s leading experts on small business tax laws.
1. Leverage your assets
* Bonus depreciation – Businesses are allowed to claim a 100 percent bonus depreciation deduction for new assets purchased in 2011 (the percentage drops to 50 percent in 2012). This allows a full write-off of the purchase price in year one. Personal property, such as furniture and equipment, qualifies; but real estate does not.
* Section 179 – Although the purchase of used property does not qualify for the bonus depreciation provision, it does qualify for a section 179 expense deduction. This is an alternative measure allowing for a write-off of the cost in year one. There is a $500,000 limit for 2011 and $125,000 limit for 2012. Certain types of real estate qualify for the section 179 deduction with a $250,000 limit (for 2011 only).
2. Increase your workforce, shrink your tax debt
The government is offering employers a $1,000 tax credit for hiring each employee. The business owner must retain the new employee for at least a year. The employee’s wages during the last 26 week period must equal at least 80 percent of the first 26 week period. The credit is available for employees hired after February 3, 2010 and before January 1, 2011 and is claimed on the 2011 tax return.
3. Write off start-up expenses
The tax code allows businesses to write-off $5,000 of start-up expenses. This $5,000 deduction is reduced by the amount that your total start-up expenses exceed $50,000. Any start-up costs that are not allowed to be expensed can be amortized over a 15 year period. Start-up costs include amounts paid either to create a trade or business or to investigate the creation or acquisition of a trade or business. Examples include: advertising the opening of a business; employee training; and a market survey.
4. Plan for retirement, save on taxes
There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner for himself or herself and for employees can be deducted. Furthermore, the earnings on the contributions grow tax free until the money is distributed from the plan. The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan.
5. Get credit for health insurance
* Small employer health insurance credit – There is a relatively new small employer health insurance credit equal to 35 percent of the employer’s contributions. This incentive helps small businesses afford the cost of covering employees. The employer must offer health insurance for the first time or maintain existing coverage and must pay at least half of the premium cost. To qualify, the small employer can have no more than 25 full-time employees and the wages can average no more than $50,000.
* Self-employed health insurance deduction – The tax code allows small business owners to deduct the cost of health insurance paid, including Medicare Part B premiums, for the taxpayer, spouse and dependents. To qualify, the insurance plan must be established under the business and personal services must be a material income-producing factor.
6. Profit from business losses – Your business may have incurred a loss in the current year as a result of expenses exceeding income (net operating loss). You’re entitled to offset this loss against other income or gains on your tax return. Then, you can take any remaining business loss and offset it against income in another year (back or forward) so you don’t lose the benefit of the write-off.
7.Accelerate expenses and defer income – A basic way to reduce your tax bill is to accelerate expenses and defer income before year end.
8. Organize tax records & documents – Start collecting and organizing your tax records, documents and Quick Books files prior to the filing deadline in the spring of 2012, so you’re not rushing around towards the end of the process.
9. Plan ahead – Begin planning ahead for 2012 estimated taxes by running projections of your income and expenses and looking at tax law changes.
10. Seek expert assistance – If you think these tax issues are too complex to handle on your own or in using a product like Turbo Tax, find a professional accountant for expert assistance.
If you are a tax consultant, feel free to share your advice/suggestion for start-ups, small businesses and entrepreneurs on tax-related issues. We look forward to your valuable comments and feedback.