Every April my dad would lock himself up in our living room. My brothers and I were all told not to bother him under any circumstance, but I would occasionally sneak a peek through the louvered doors. Through a raised slat, I could see him hunched over an adding machine, pouring through piles of papers, swearing up a storm.
My father was proud to call himself a small businessman. He ran a small TV shop on Sunset Boulevard in Renton, Washington. April was tax time and my dad took his tax preparation very seriously, so seriously that he would use words that would leave me kneeling in the corner if I were to say them.
When I started my own business years later, I swore I would never make the same mistake my father made. After all, April 15 comes and goes every year, I told myself. What imbecile couldn’t get his act together with an entire year’s warning?
Me, that’s who.
I had the best of intentions, of course. The problem was execution. I had a business to run. There was always more to do than time available and all that bookkeeping stuff, well, it would have to wait until I had a few moments to spare.
Those few moments never arrived before Tax Day year in and year out. So I would religiously file a six-month extension. Come October, when I could no longer put it off, I plopped down on the office floor for a long weekend, surrounded by stacks of papers and wondering why the devil invented double-entry accounting.
It took me almost 10 years to finally hire a real accountant. It was the smartest thing I ever did. And with the forthcoming tax tips I am about to pass on to you, I will also pass on one from my CPA: Always seek the advice of a tax professional, especially when it comes to anything I suggest.
Take it all online.
The best thing I ever did (after getting an accountant) was automating my bookkeeping. Once online bookkeeping sites came along, I never had to file an extension or dream in double-entry debits and credits again. All I ever had to do was print out copies of my Profit & Loss Statement and my monthly income statements and my accountant would do the rest. All my bank and charge accounts and invoices were linked to the bookkeeping site, which captured them all in IRS-approved expense categories.
That’s a smart deduction.
Deductions are a normal part of your business. They are designed to help your business grow by allowing you to write off certain business-related activities. What is and isn’t deductible changes every tax year. Sadly, a lot of very legitimate deductions go unclaimed by small businesses each year, roughly 20% of all lost credits. Either the business owner didn’t know about the deduction or was afraid to claim it for fear of being audited. Become an expert in what your allowed deductions are – your bottom line will thank you.
On the road again…
If you use your personal car to meet with vendors, woo clients or make deliveries, you may be able to recoup some of the cost. The first rule is to check with your accountant. The second is to keep a detailed mileage log of all your trips (should you be audited), showing the miles you drove for business reasons. The rate in 2020 is 57.5¢ per mile. The other option is to log all “actual car expenses” such as insurance, licensing gas, oil, tolls, parking fees, repairs, etc. But most business owners take the standard deduction because it’s easier and requires less record-keeping.
A retirement plan can really add up.
A retirement plan may also be deductible. You can participate in a 401(k) program and deduct part of your contributions. In 2020, the limit is $57,000 ($64,500 if you’re 50 or older) or 100% of earned income, whichever is less. You can contribute as both the employee and the employer, with salary deferrals of up to $19,500 (plus a $6,000 catch-up contribution if you’re 50 or older). Ask your account what the best option is. Also, as an employer, you may be able to deduct some of your contributions to your employee’s 401(k) plan. If you don’t offer a plan and want to get one with no employer fees and an easy setup process, check out Washington State’s RetirementMarketplace.com.
Spreading the word.
Marketing is essential for a small business. It’s also a smart place to look for additional deductions such as the cost of building and maintaining a website, designing collateral, business cards, logo, signage, etc. You can also deduct the cost of sponsoring an event. Don’t forget some of the less visible costs, such as the cost of renting servers to host your website or the purchase price of a mailing list to reach new customers.
Feeling charitable?
Good for you! But don’t bother with the deduction. Sole proprietors, LLCs and partnerships can’t deduct charitable contributions as a business expense any longer. You may still be able to claim your charitable giving on your personal tax return, but the new Standard Deduction on your taxes raises the itemizing threshold to the point where it may not be worth it.
The list goes on and on.
This is just the tip of the proverbial deduction iceberg. There are also deductions related to business travel and meals, insurance, bank interest and fees, depreciation on equipment, education and training, legal and professional fees (like your accountant), office expenses, salaries and benefits, telephone and internet service. There are also special deductions for gig economy workers and freelancers related to maintaining a home office.
In the end, you can always extend.
If you aren’t going to owe any taxes or are expecting a refund, filing an extension is a safe bet and gives you a little more wiggle room to get organized, especially if you’re just getting started. Roughly a third of all business filings arrive at the IRS in November. If you think you owe taxes, file in April. The IRS may charge you interest and penalties, even if you file an extension.
Building a business is hard work and costly. While it’s good to pay your fair share to Uncle Sam, it’s also smart to save as much money as you can so you can continue to build your business.
In the Evergreen State, counting nickels, saving dimes,
Robb