Tax time cometh, and the small business owner runneth in fear to the caves. But that's not really the best idea, is it? Fear not, friends. I contacted several tax professionals to pull together some advice and tips, especially for Q4 and end-of-year taxes.
Here are tips from Miguel G. Farra, CPA, JD, and principal-in-charge of the Tax and Accounting Department at Morrison, Brown, Argiz & Farra, LLC, a top 40 public accounting firm; Michael Carney, CPA and owner of MWCAccounting, specializing in small business taxes; and Matthew Brock, CFP and owner of DivergentPlanning, LLC, a financial planning firm for self-employed and small businesses.
Q: How can small business owners handle tax preparation properly, keep things in order, and not freak out when they realize that it's tax time again?
MC: Keep an accurate tax diary. Invest in a tax organizer, save all of your receipts and educate yourself on small business tax deductions so that you know what to keep track of and don’t miss tax savings opportunities. Though many small business owners like to go it alone, in the long run, hiring a tax professional that specializes in small business taxes and can advise you year-round, is an investment that yields both time savings and financial savings.
MB: Make sure to be organized. Contact your CPA now and ask if they have a checklist they can send you so you can start to get all your documents and data together. Having your books updated and understandable will make your CPA’s job much easier.
Q: What are some simple ways small business owners can better handle taxes and tax preparation?
MF: Consider setting up a defined benefit plan. Small business owners over the age of 50 can make a bigger contribution to defined benefit plans than to defined contribution plans.
MC: Consider the tax implications of all their business decisions. Before you make a big purchase, consult the current tax laws or your tax professional. The timing of business purchases can play a big role in what, how much, and how quickly you can write them off.
MB: If you are a 1099 employee and not paying quarterly estimates, consider talking with a CPA and setting this up. It can really help you manage your cash flow throughout the year.
Q: Do you have any general tips on 2011 tax deductions?
MF: Consider adopting a Simplified Employee Pension plan or SEP. If you are self-employed with few if any employees you may be eligible to get a tax deduction for your contribution as late as Oct. 15, 2011.
MC: Small deductions such as dry cleaning, business-related education, or a social event that turned into a business meeting are commonly missed, but add up. It’s in a small business owner’s best interest to educate themselves on all of these deductions, so that they can track them properly in their records. Improper categorization of expenditures can put you at risk of losing deductions. Deduction rules change from year to year, and not keeping up-to-date with current tax laws in your jurisdiction can result in a loss of savings.
MB: Remember to take your mileage deductions for any driving you have done. The new rates are here. If you haven't been tracking it throughout the year, it still may be worth it to spend a few hours on going back and tallying it up in a spreadsheet. Ask your CPA what they want for this specifically."
Q: What are some specific tips for 2011 end-of-year tax preparation?
MF: For salaries received or paid during 2011, the 2010 Tax Relief Act reduces the employee's tax rate under the FICA tax by two percentage points to 4.2 percent. This also applies for self-employment income for 2011. Any 2011 bonus must be paid in 2011 for this to apply.
MC: Maximize your Capital Cost Allowance claim by purchasing any equipment or technology you may need in the coming year and delaying any disposing of depreciable assets. This is especially important to take advantage of in the 2011 tax year, as the deduction limits have significantly increased and there is a 100 percent bonus depreciation for new equipment (due to the Tax Relief Act of 2010 as well as the Jobs Act of 2010).
MB: Revisit your budget or discuss with your staff what things you may need to purchase in the next six months or so. Consider buying them before the end of the year. This can include equipment, supplies, rent, insurance, or any bills you can pay early."
Annie Mueller is a freelance writer based in St. Louis. She covers small business topics with a focus on lean/zero budget start-ups, business blogging, and simple (sane) ways business can use social media without selling their souls to Facebook. Her work can be seen online at Investopedia's Financial Edge blog, Young Entrepreneur, Wise Bread, Organic Authority, Modern Mom, and her own site, AnnieMueller.com. Find her on Twitter: @AnnieMueller.