Jerry (opening a mail package): “Hey, what happened to my stereo – it’s all smashed up!”
Kramer: “It looks like it was broken during shipping. But I insured it for $400.”
Jerry: “So we’re going to get the post office to pay for my new stereo now?”
Kramer: “It’s a write off for them.”
Jerry: “How’s it a write-off?”
Kramer: “They just write it off.”
Jerry: “Write it off what? You don’t even know what a write off is, do you?”
Kramer: “No. I don’t. But they do.”
Many people don’t understand the ins and outs of the tax code and it’s not surprising. Federal, state, and local taxes can be very complicated (write-offs included.) Nevertheless, it’s true that when it comes to taxes, you as a small business owner have two duties:
- To pay whatever it is you owe, and
- To figure out how to legitimately reduce your tax bill to the extent you legally can.
Here are our top tips that help you do both of those things:
1. Deduct all expenses that are “ordinary and necessary”: The higher your expenses are, the less you will show as income, and the less you show in income, the less you will pay in taxes. Some tax expense deductions are obvious – advertising, labor, rent, and so on. But others are less so and thus are even more important because they can be overlooked:
- Home office deduction: By some estimates, less than half of the eligible small businesses run from home take the home office deduction.
- Business debts
- Startup costs: Expenses incurred before you open the doors can be deductible.
- Trips that combine business and pleasure.
2. Make sure you pay all taxes for all employees. More than almost any other tax, the IRS comes down hard on missed employee-related taxes. These include:
- Unemployment tax. You need to also pay federal and state unemployment taxes.
3. Make sure to pay all sales taxes to all entities. Where I live, a giant mattress chain store just went out of business. Why? They didn’t pay sales tax to the next-door state where many of their customers came from. Having what the IRS calls a “presence” in a state is the rule.
4. Get your quarterlies in on time. The self-employed have estimated taxes due four times a year: April 15, June 15, September 15, and January 15.
5. Charitable Contributions. Charitable contributions typically “flow through” to the individual tax returns of shareholders (unless yours is a C corporation.) These are the basic charitable giving rules:
6. Avoid the dreaded audit: No one wants an audit. Here are a few tips that can help you avoid one:
- The charitable organization must typically be a non-profit. See “exempt organizations.”
- In general, donations of property can be deducted only for their fair market value.
- Pledges to give cannot be deducted until the contribution is actually paid.
- Avoid payroll tax problems at all costs. Payroll tax debts are taken seriously by the IRS and must be avoided if you want to avoid an audit.
- File on time
- Don’t over-deduct: This is a red flag. If it’s not “ordinary and necessary” don’t deduct it.
- Don’t do your own taxes: At some point, most small businesses outgrow do-it-yourself tax planning and software. A good accountant and/or bookkeeper is a necessity.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.
Bank of America, N.A. engages with Steven A. Strauss to provide informational materials for your discussion or review purposes only. Steven A. Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steven A. Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.