Whether your business is set up as a sole proprietorship or a single-member LLC, your tax returns for 2014 are due on April 15, same as for individuals.1 Are you taking advantage of the tax deductions available for small-business ownership?
We spoke with Wade Wiitala, a certified public accountant in Plymouth, Minnesota, who shared with us some tips he gives his small-business clients regarding business deductions. See how you might benefit from these deductions as you finalize your 2014 tax records and get a good start on 2015. You can read them in order as shown or click on the links below to drop down to a particular section:
- Startup deductions. When you open your small business, you can deduct $5,000 for startup costs and another $5,000 for later organizational costs. Any amount over these figures must be amortized over 15 years.
- E-commerce businesses. Recent state sales tax laws are changing the way e-commerce businesses are managing their accounts. If you do business nationally, be aware that any out-of-state purchases may be subject to your state’s sales and use taxes. Wiitala advises working with a sales tax expert who can help set up a sales tax accounting system.
- Home-office deductions. You can calculate the deduction for your home office in two ways. The first is based on square footage. If your house is 1,000 square feet and your office space is 100 square feet, then you can deduct 10 percent of your repairs, utilities, mortgage interest, property taxes and home insurance directly against your self-employment income. If any expenses apply directly to your business ― such as repair work done only to your home office ― you can deduct 100 percent. You can also depreciate the cost of your home office over 39 years. The second option is the simplified method. Basically, you get a standard deduction of $5 per square foot of your home used for business (maximum 300 square feet). No depreciation of the home office is allowed under the simplified method. Note that in both options, the space designated for your business must be used only for your business.
- Meals and entertainment. You’re allowed to take a deduction for business meals and entertainment. Make sure to keep your receipts and write on them the name of the person you conducted business with and a statement of the business discussed. This is an area that the IRS typically focuses on during an audit.
- Mileage deductions. If your vehicle is used for both personal and business travel, you can deduct a certain amount per mile driven for business (57.5 cents per mile in 2015). However, in case of an audit, you must be able to account for all the miles you reported as a business expense. Thus, keep a mileage log and enter your miles traveled after each business trip for proof of your deduction.
- Asset depreciation. When you purchase an asset such as a computer, you typically must depreciate it over 5 years. However, under IRS Code Section 179, you may be able to deduct some or all of it in the first year.
- Charitable deductions. Consider your tax bracket and projected tax bill when deciding on the amount to contribute for the year. It’s best to make a charitable contribution in the year you’ll gain the most tax benefit.
- Affordable health care tax credit. To qualify for the health care tax credit as a small business, a few things need to line up: You must have 50 or fewer employees; each employee must earn an average annual wage of less than $50,000; you must cover at least 50 percent of the cost of healthcare coverage for each employee through a Small Business Health Options Program (SHOP). The maximum credit is 50 percent.
- Employee retirement fund. Businesses can deduct the amount of money the company contributes toward their employees' 401(k) or other retirement funds. Small-business startups get a tax credit during their first three years for opening a retirement plan for their employees.
- Like-kind exchange. If you sell a piece of property and purchase another in a like-kind exchange, you can defer paying taxes on the first property until you sell the second property. The money you received from the sale of the first property must be given directly to a financial intermediary who puts it into a trust fund. The intermediary then uses the trust-fund money to purchase the second property for you.
- 1099 tax forms. You must file a 1099-MISC whenever you pay an unincorporated independent contractor $600 or more in a year for work done in the course of your business. Also, if you receive a 1099-MISC for work that you performed for someone else, you must report these 1099-MISC amounts as income on your tax returns. The IRS receives a copy of the 1099-MISC and will match it to your tax return.
- Tax return records. Keep your tax returns permanently in case the IRS notifies you for tax records. While the IRS typically audits taxpayers up to three years (or seven years if something’s amiss), they can technically audit you indefinitely if they suspect fraud. You can shred backup documents, such as receipts and canceled checks, after seven years.
Above all else, Wiitala stresses the importance of communicating with your accountant. He advises all small-business owners ― as well as individuals ― to meet with their tax advisor at least twice a year.
Wiitala likes to see his clients in July and November or December to go over their tax plan, discuss financial goals, and consider plans to stay on track. Then in January or February he meets with them again to receive their final records for tax preparation.
Not quite ready?
If you still have stacks of receipts from 2014 to go through, Wiitala says to input your income and expenses into an accounting software, such as QuickBooks, and contact an accountant as soon as possible for help.
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Need more time to prepare your taxes for 2014? As a sole proprietor of a business or a single-member LLC, you can request a six-month extension from the IRS, but your request must be received by April 15.
“You have to remember, however, that while an extension gives you additional time to file your taxes, it doesn’t give you additional time to pay your taxes,” Wiitala says. You need to estimate the taxes you may owe and send in a tax payment by April 15 to avoid interest or penalties.
Not filing by April 15 and not requesting an extension will land you a failure-to-file penalty. According to the IRS you can expect a stiffer penalty when you altogether ignore the April 15 deadline than if you fail to pay on time.
If you file your taxes on time but aren’t able to pay what you owe by the April 15 deadline, you can ask the IRS for an installment agreement to make payments. Contact the IRS for repayment options and ways to defer the failure-to-pay penalties.
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1Jean Murray (2014). “2014 Business Tax Return Due Dates,” About Money.
2For details on the FedEx Money-Back Guarantee, see Our Services at fedex.com.
3Terms, conditions and weight limits apply. Proper packing required. See the FedEx Service Guide for details.
4The flat rate is determined in part by three zones from origin to destination: generally 0–150 miles, 151–600 miles and 601-plus miles.
FedEx is not paying Mr. Wiitala for this article and does not in any way endorse his services or the information provided herein. Individuals should conduct the research necessary and speak to the appropriate professionals to determine what is applicable to their business.