Decisions about your business tax return can have a huge impact on your company profit. If you do some planning, you can reduce the amount of taxes you need to pay. Planning also helps you avoid any penalties and interest on your tax return. Use these small business tax tips to make smart decisions:
Understand which return you need to file
Some of your tax decisions are made based on the type of tax return you file. Many small business owners are sole proprietors. These owners use Schedule C of their personal tax return (Form 1040) to file business taxes. The profit of the business is added to other income on the personal return.
If your business is a partnership or corporation, you’ll file a tax return that is separate from your personal return. In all cases, make sure to maintain separate bank accounts for personal and business spending.
File returns and pay your payroll taxes on time
Many small businesses don’t file their payroll tax returns on time. Since the return is submitted late, the company may also pay a portion of the payroll taxes late. In both cases, your company is subject to penalties and interest charges.
The typical business must pay federal, state, local and even city payroll taxes. These tax laws change constantly, so consider using a payroll service to calculate your taxes and file your returns. Retaining an outside service or using specialized software can help you avoid making mistakes.
Plan your cash flow
Every business is required to pay a percentage of the years tax liability through estimated taxes. The idea is that you calculate your profit each quarter. You then calculate the year-to-date company profit, and pay estimated taxes based on that profit.
Say, for example, that your year-to-date profit is $100,000 at the end of the second quarter — and your accountant estimates that you would pay $30,000 in taxes on the $100,000 profit. The IRS requires you to pay a percentage of the $30,000 tax liability before the end of the year.
Work with a CPA to estimate your annual tax liability at the end of each quarter. Plan your cash flow so that you can make the required estimated payments.
Depreciation on fixed assets
If you own a restaurant, you own fixed assets such as table, chairs and kitchen equipment. These assets depreciate; a depreciation expense is the decline in value of an asset over time, and your business tax return should include depreciation expenses.
Check with an accountant to determine that amount of depreciation you can take for each asset. You may be able to use accelerated depreciation. This method allows you to deduct a larger amount of depreciation in the first several years that you own the asset.
Accelerated depreciation is sometimes added to the tax laws to encourage companies to buy more assets. If businesses spend more, it can help boost the economy. The catch is, these tax laws change frequently — which is why it’s important to always check with a certified public accountant to determine if the laws apply to your business.
Planning for your tax return may allow you to reduce your tax liability for the year. With that in mind, consider working with an accountant to plan your tax year, and use these small business tax tips to minimize the amount of cash you pay the government.
Photo Credit: Alan Cleaver
for small landlords, try to pay bills by December 31. If you have a big bill due around that time, pay it by Dec. 31 and you can write off the expense a whole year sooner and get the deduction for it a year sooner. If you pay Jan 1 you must wait an entire year longer to deduct that expense.