Tax Time: What Small Business Owners Need to Know
It’s tax time! Tax season is upon us and that means going through receipts, checking ledgers, and filling out endless IRS forms. For small business owners, this can be an especially tense time, as businesses are significantly more likely to be audited than individuals.
According to the IRS Data Book for FY 2012 (the 2013 version is coming out soon), the audit rate is 1% for all individuals and between 2.4% and 3.6% for individuals with business returns – including small business owners.
So it is important that small business owners are fully updated on tax filing changes from 2013. You can find out about some of the most important changes below, as well as some tips on how to file your taxes safely and cost-effectively.
2013 saw the passage of several new tax laws that take a toll on small business owners, depending on their financial status.
Raised Tax Rate
The tax rate for the top federal wage increased this year, from 35% to 39.6%. This applies to those earning $400,000 for single filers, $450,000 for married couples filing jointly and $425,000 for heads of household. Additionally, top income taxpayers (starting at $300,000 for married couples filing jointly and $250,000 for singles) may see their itemized deductions and personal expenses phased out. So if your business had a profitable year, expect a bigger tax bill in the coming months.
The Affordable Care Act implemented a new Medicare tax, which levies a 3.8% tax on net investment income, including income received from bonds, loans, stocks, and mutual funds. There is an additional 0.9% Medicare tax on wages and net earnings from self-employment. You are subject to these taxes if your income exceeds $200,000 as a single person or $250,000 as a married couple filing jointly.
Thresholds for Medicare taxes aren’t adjusted yearly for inflation. So even if you don’t qualify for these taxes this year, you may in the coming years if your business thrives or even just maintains its current level of profitability. Check out the Congressional Healthcare page for more information on this tax and how to file it.
While new taxes are never welcome, the good news is that there are a few new deductions available to small business owners. Don’t cheat yourself out of your well-earned money by ignoring them!
Home Office Deduction
If you use a room or a portion of your home as an office space, you may be able to deduct your business-related home expenses. In previous years, this deduction involved calculating all the individual expenses, including mortgage interest, repairs, insurance and utilities.
Now, the IRS offers a simplified process whereby you multiply the square footage of your office space by a prescribed rate (the standard rate is $5 per square foot, up to 300 square feet).
Equipment and Machinery
The IRS lets you deduct a wide range of business-related equipment, including business-related software, computers, printers, and business cars.
For 2013 there are several available options for deducting these costs. You can deduct the full cost on the year of purchase (up to $500,000) or spread the deductions over a period of time. Additionally you can deduct 50% immediately for equipment costs above the $500,000 limit. However, this bonus depreciation only applies to new property, not used items.
To calculate your equipment-related tax savings quickly and easily, use Calboa Capital’s Tax Savings Calculator.
Higher Mileage Rate
As a small business owner, you probably log many business-related miles. Fortunately you can claim these miles as a deduction. The rate for 2013 is 56.5 cents per mile, up a penny from last year.
But be careful about which trips you claim. Your commute doesn’t qualify, but you can claim trips to meet with clients, to make business-related purchases, and to visit business sites other than your primary work site.
Looking to Next Year
It can be tempting to forget about taxes completely once you’ve finished filing for 2013. But it will make next year’s tax season much easier if you get a head start now. If you are the owner of a limited liability company (and so report your business income on your personal return) then you may have to pay estimated taxes for 2014. The first payment is due on April 15th, 2014, so be sure to meet the deadline to avoid penalties.
Get organized for the coming tax year. If you’re currently using manual payroll and expense tracking systems then you know what a pain they are once tax season rolls around.
Consider investing in an electronic payroll and resource allocation system that tracks and integrates your payroll, income, and expenses. You will be able to clearly see how much you are making during the year and where that money is going, which will improve the tax filing process and also maximize your profits.
Taxes are never fun, but don’t lose money and risk penalties by not doing the necessary research. Getting informed on the current taxes and deductions can only improve the financial health of your small business.