Business Tax Deadline

Many W-2 employees have already filed their tax returns and are enjoying hefty refunds while you, lucky business owner, are sorting through receipts, and constructing accounting records, but it doesn’t have to be painful if you use Quickbooks, TurboTax, and follow these tips.

If your business is incorporated and reports on the calendar year basis, as most do, your corporate tax return is due on March 15. If you own a partnership, LLC or sole proprietorship and you are not incorporated, your tax return isn’t due until April 17 this year.

If you miss those deadlines, you can apply for an extension for filing, but do you really want to have your taxes hanging over your head all summer? Best to knuckle down and get it done right now, if you can.

But in your rush to pull everything together for last-minute filing, don’t overlook some important deductions.

Organize your receipts – If you have tax receipts stashed here and there, carefully gather them together in one place and make a list of them. Add that information to the accounting records you create from your check register and credit card statements, being alert for duplications. Don’t ignore these extra deductions: tossing out $100 of deductible receipts is like throwing $30 in the trash. Don’t forget to include end-of-year credit card purchases. They are deductible when you charged them, even though you didn’t pay the credit card statement until the next year.

Home office deduction – Many business owners work from home – if you have space in your home dedicated to business activities, it is likely you are entitled to a home office deduction. TurboTax will lead you through a series of simple questions to be sure you qualify for the deduction. Take the deduction if you qualify – there is an urban legend that claiming a home office deduction will target you for an IRS audit, but that simply isn’t true.

Auto expense – Even if you work from home, you probably use your vehicle to visit clients, run to the post office or purchase supplies. Add up those trips and claim a deduction for the miles.

Save for retirement – If you’ve claimed all your deductions but your tax bill is still high, consider contributing to an IRA, SEP or SIMPLE. Though pension plans have to be established before year end, IRAs, SEPs and SIMPLEs can be set up and funded any time before the due date of your tax return. TurboTax will compute the maximum contribution you can make, but even if you contribute less than that you still will enjoy some tax savings while securing your future retirement.

Hire your children – Now is the time to begin planning for next year’s tax filing. If you have older children, hire them to do office clerical duties and other routine tasks for your business. Children can earn income up to $5950 in 2012 if you claim them as a dependent before they have to file tax returns, and children employed by their parents aren’t subject to social security and Medicare taxes if the business is operated as a sole proprietorship or a partnership between the parents.

Pay estimated taxes – Unlike W-2 employees, business owners don’t have taxes withheld from their income, so to avoid penalties you are required to pay estimated taxes. When you prepare your return, TurboTax will ask you if you want to compute the estimated taxes you must pay for the rest of the year so you won’t owe penalties when you file your tax return next spring.

Small Business Health Care Credit

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Small business owners are eligible for a new health care tax credit, provided they meet certain eligibility requirements. According to the IRS website, your business:

• Must cover at least 50% of your employees’ health care costs
• Less than the equivalent of 25 full-time workers (thus, a company with 50 part-time workers could be eligible to participate)
• Average annual wages of less than $50,000

Both for-profit and non-profit entities can claim this credit, which “is worth up to 35 percent of a small business’ premium costs in 2010 (25% for tax-exempt employers.)” The deal gets even sweeter in 2014, when 50 percent of premium costs are credited – although the 35 percent figure remains in effect for non-profits. Not sure whether your business qualifies? Use this three step fact sheet to find out.

75% Exclusion Of Small Business Capital Gains Tax

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Prior to the American Recovery and Reinvestment Act of 2009, only 50% of capital gains on qualifying small business stock (issued after February 2009) was exempted from taxes. That threshold has since been raised to 75%. The remaining 25% of capital gains are taxed at a “maximum rate of 28 percent”, according to the Tax Policy Center. There are some requirements and restrictions, however.

First: to qualify as a “small business” and become eligible for this exemption, your business must have below $50 million in gross assets and must not operate as an S corporation. Furthermore, the “maximum gain eligible for the exclusion is the greater of $10 million ($5 million for married taxpayers filing separately) less any gain reported on prior tax returns, or 10 times the taxpayer’s cost basis (purchase price plus fees).”

Five-Year Carryback Of Net Operating Losses

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In 2009, small business owners received a sorely needed lifeline from the IRS: five-year carryback of net operating losses. This deduction (which allows business owners to offset taxes owed in one year with losses from another) was formerly only allowed for two years at a time. Per the IRS:

“The Worker, Homeownership and Business Assistance Act of 2009 allows most taxpayers to elect a 3, 4, or 5-year carryback period for an applicable NOL or loss from operations to offset taxable income in those preceding taxable years.”

One key requirement for claiming this privilege: the election to use the NOL carryback must be made within six months of a return’s due date.

$10,000 Startup Expense Deduction

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Prior to last year, entrepreneurs could only deduct up to $5,000 in startup costs stemming from the launch of a new business. But as part of the Small Business Jobs Act, this deduction was expanded:

“The bill temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000, offering an immediate incentive for someone with a new business idea to invest in starting up a new small business today.”

This is directly applicable to your upcoming 2010 tax return. If you launched a business last year, it’s in your best interest to claim as many legitimate deductions (up to the temporarily expanded $10,000) as possible.

0% Capital Gains on Small Business Investments Held 5 Years Or More

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We’ve already alluded to the 75% small business capital gains tax deduction enacted in 2009. Last year, though, an even sweeter (albeit temporary) incentive was put forth. In 2010 only, over a million small businesses were eligible to exclude from the capital gains tax investments – as long as they were held for five years or more.

This provision (which was included in the Small Business Jobs Act) affects your 2010 tax return. As of yet, there are no plans to extend this unusually generous allowance into future tax years, although that could change.

100% Expensing For 2011

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Beleaguered small business owners have one thing to be happy about in 2011. For this year only, entrepreneurs can utilize “100% expensing” to deduct from income taxes all expenses in “productive capital investments”, including delivery trucks, machines and aircraft. Prior to this policy, the only option was to depreciate the cost of these items over several years (thus spreading out the tax benefit.)

A business that makes a $1 million investment and pays a 35% tax rate could shave $350,000 from its 2011 taxes instead of perhaps $50,000 under current law, Treasury says.

As USA Today explains, the hope is that firms will have “lower taxable income and more money to spend” as a result of the immediate write-off. A preliminary Treasury Department analysis says that some 2 million companies will take advantage, generating “roughly $50 billion in added investment.”

Simplified Cell Phone Deductions

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It used to be that deducting cell phone expenses was a burdensome chore for small business owners. Since 1989, cell phones were considered “listed property” by the IRS, meaning that there were all kinds of onerous forms and paperwork to fill out before validly deducting them on income tax returns.

Thankfully for entrepreneurs, this all changed with the Small Business Jobs Act. Per LexisNexis, cell phones are now “de-listed” and thus exempt from the time-consuming requirements of old. Now, “employees will no longer need to keep detailed records to track their cell phone usage” in order to claim deductions.

Choose Your Entity Wisely

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One of the most important tax decisions your startup will make is the legal entity you use. The IRS views your company differently depending on whether you’re a sole proprietor, corporation or partnership. Each of these entities has advantages and disadvantages (some of them totally unrelated to taxes) and there is no “best” entity for every startup. Rather, you need to pick the one that best suits yours.

A C corporation, for instance, is undesirable for many startups because of double-taxation. The company pays a corporate income tax in addition to the taxes each owner pays individually. S corporations and Limited Liability Corporations (LLC) avoid this because they use flow-through taxation. As the name implies, company income “flows through” to the owners, who pay taxes only on what they receive. One key difference: in an LLC, income is allocated by partnership interests (or how much of the company you own.) CNN recommends LLCs for most small businesses.

Determine What Full Tax Compliance Actually Entails

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You also need to determine the entirety of what full tax compliance means for your startup. This is largely a function of your legal entity, but the state and city in which you work can also impose tax obligations of their own. Many large cities (Philadelphia, for instance) levy business privilege taxes on companies operating within city limits. Unlike other taxes (which fall on net profits) business privilege taxes are assessed on gross receipts as well.

In other word: if your company sold $1,000,000 worth of products last year, you owe the city a percentage of that number – no matter what your costs were. Even if you were unprofitable, you still pay. Other requirements of tax compliance apply no matter where you are:

• Obtaining an Employer Identification Number
• Filing corporate tax returns
• Licensing requirements

Separate Finances From Day One

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As an incorporated business of some kind, it’s imperative from a bookkeeping standpoint to keep company finances separate from personal ones. This means (among other things) having:

• A corporate checking account
• A corporate savings account (if you have reserves)
• Income statement & balance sheet

Intermingling corporate and personal finances can have disastrous consequences. If you are sued, the opposing lawyer can argue that you violated corporate form and sue you personally for what they allege your company did. The Secretary of State can also strip your company of its corporate status. An S corporation with over 100 shareholders, for instance, can be ruled a C corporation by the IRS and forced to start paying corporate income tax!

Document All Deductible Expenses

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Startups and entrepreneurs have one key advantage typical employees lack: the ability to deduct all business expenses. Provided the expense was “ordinary and necessary” in your line of work, it is eligible for deduction at tax time. This includes:

• Books or magazines about your field
• Industry training programs or materials
• Work-related travel
• Client entertainment
• Pro-rated portions of rent and utilities (for home offices)

The only catch is that any expense you deduct needs receipts or documentation to back it up. For best results, save all of your receipts as you accumulate them. Then, at tax time, send them all to a companythat will automatically scan and organize the receipts for you online.

Use Reliable Accounting & Tax Preparation Software

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Staying on top of all of this takes a lot of work if you do it manually. Fortunately, in 2011, the most tedious aspects of tax work can be automated by software tools. To ensure minimal time spent on bookkeeping and fewest possible mistakes, invest in capable accounting and tax preparation tools – and learn to use them effectively.

For accounting, we recommend Quickbooks, a handy application that walks business owners through the common bookkeeping tasks they most frequently encounter. For tax prep, TurboTax performs the same function, guiding you through the filing process like a GPS guides you through unfamiliar cities. Used together, these software tools will cut your bookkeeping and tax prep time exponentially.

Consider Paying Quarterly

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Finally, it often makes sense to pay your taxes quarterly – even if you aren’t required to. Many entrepreneurs delay filing until the end of the year, rationalizing all year long that it can wait. The problem with this approach is that it puts you in the position of needing a “hail Mary” pass. Unless you can come out of pocket all at once for an unexpectedly huge tax bill, you’re stuck.

By paying quarterly, you are forced to pay the previous four month’s worth of tax liability in manageable increments. It wont be any more fun sending money to the IRS, but it will spare you the end-of-year scramble to cobble together what you owe.