The Busy Owner’s Guide to Small Business Taxes
Having a good working knowledge of small business taxes can really pay off if you’re a small business owner.
Why? Because making the right tax moves can help put more money in your pocket — and put your business on the path to stronger, more profitable growth.
The Tax Cuts and Jobs Act, signed into law in December 2017, delivered the most significant tax reform package in more than 30 years. Tax experts may differ on the broader impact of the law, though they’re generally united that these new tax laws are great news for many small business owners.
Key benefits of the revised small business tax laws include:
- Tax relief for pass-through businesses (e.g., limited liability companies (LLC), S corporations, partnerships, and sole proprietorships)
- Reduced corporate tax rates
- New business-friendly depreciation rules
- More favorable deduction guidelines
The tax cut frees up cash for many small business owners to invest in their company and employees. A recent survey by the National Federation of Independent Business found that in the wake of tax reform nearly half of its members said they plan to increase investment in their business.
Here’s a breakdown of self-employed taxes so you can reap maximum benefits while keeping tax-season stress to a minimum.
Make the most of tax deductions
Simply put, the more deductions you have, the less tax you’ll pay. Make sure you’re tracking deductible expenses, such as advertising and marketing costs, travel and mileage, professional and legal fees, and charitable donations on an ongoing basis. Even after you’ve closed the books for the year, you can grab a significant deduction by contributing to an IRA up until the April 15 filing deadline.
Take advantage of pass-through deductions
Qualifying for the new pass-through deduction can reduce the income taxes you pay by as much as 20 percent.
Regardless of your industry, if your projected taxable income is under $157,500 as a single filer or under $315,000 if married and filing jointly, you should qualify for the pass-through deduction, according to Devin Wolf, CFP, a lead advisor at Financial Plan Inc.
Wolf also advises that above those income thresholds, you should look at your industry, wages, and depreciable assets to determine if there are moves like putting a cash-balance plan or retirement plan in place that can get you below the limits.
Be aware of new rules for entertainment deductions
The party is over when it comes to entertainment deductions. Previously, you could take clients out to a meal and a concert and write off 50 percent of those expenses. You can still write off business-related meals at 50 percent, but entertainment is out as a deduction. Make sure you keep receipts separate for meals and entertainment so there is no confusion come tax time.
Your business might benefit from new depreciation rules
The revised law is more generous when it comes to depreciation. Small businesses can immediately expense more of the cost of certain business property, and many are now able to write off most depreciable assets in the year they are placed into service.
So, through 2022, business owners will be able to write off 100 percent of the cost of a new piece of equipment in the year it was purchased, compared to 50 percent for 2017. After 2022, that percentage that a business owner can write off will then ratchet down in 20 percent increments, eventually hitting zero in 2027.
For example, if you’re a building contractor with $150,000 in gross profit and you purchase a $50,000 piece of equipment. You can take a $50,000 write-off on your small business taxes for 2018 and end up reporting $100,000 total profit on your tax return.
Review the ideal entity for your small business
As a small business, the IRS allows you to organize under several different entities, such as C corporations to S corporations, LLCs, and sole proprietorships. The new tax law has both benefits and drawbacks for each type of entity, so it’s a good idea to have more in-depth conversations with your tax advisor to determine the best choice if you are a new business or whether to make a change for your existing business.
One potential pitfall to be aware of, particularly for new small business owners, is simply assuming that establishing your business as an LLC is the way to go, instructs Eva Rosenberg, who runs taxmama.com and has written several books on small business taxes.
“Too many people are setting up LLCs that they don’t really need because they want the liability protection,” says Rosenberg. “That can end up being very expensive from a tax perspective. The better, more affordable option might be to simply get good liability insurance and organize as another entity.”
Look forward with forecasting
As we all know, tax season will roll around again, so it makes sense to be well-prepared for it.
Dave Danic, director of tax at Summit CPA Group, recommends using a good cloud-based small business accounting system that has planning and forecasting capabilities built in. Once you have data and financials plugged into the program, try to forecast profits and expenses six months to a year ahead, so you can work with your accountant on an ongoing basis to make smart tax moves.
“The biggest disservice I can do to our small business clients is to deliver a surprise come tax time — but it’s also a two-way street,” Danic said. “You need to have an open line of communication with your accountant. Maybe schedule quarterly meetings so they can keep records up to date and provide timely advice for reducing your tax bill.”
By being aware of the key elements of the new tax law and keeping up with potential tax implications all year long, you put your small business in a position to succeed — and make working on your small business taxes easier.
This information is provided for informational purposes, may not be applicable to all situations, and is not intended to provide legal, tax, or financial advice. For specific advice about your unique circumstances, you may wish to consult a qualified professional.