Alas, the deadline to file 2015 taxes is fast approaching. But for savvy business owners, the prep work for next year's taxes is just beginning.
Small businesses collectively face an average effective tax rate of 19.8 percent, according to the US Small Business Administration's Office of Advocacy. That can amount to thousands of dollars or more in taxes each year — no pocket change for your typical mom-and-pop shop.
The good news: While it's likely too late to reduce the taxes you'll owe by this year's April 18 filing deadline, entrepreneurs who start preparing today could reap thousands of dollars in deductions next year, financial experts say.
"There's always some missed opportunity on deductions for small business owners," said John Wheeler, a CPA and senior financial consultant at Castle Wealth Advisors in Indianapolis.
From tracking the miles you drive to wrangling receipts, here are five key moves business owners should make to take the sting out of tax time next year.
If you're not an incorporated company, you aren't required to keep a separate bank account for your business — but it's still a good idea for several reasons, said Gail Rosen, a CPA in Martinsville, New Jersey.
Handling your personal and company expenses in different accounts makes it easier to keep records and prepare tax filings for the following year, Rosen said. And, if you happen to be audited, you won't have to sift through your personal transactions.
"The thing to do is to have a separate checking account for any business-related expenses," Wheeler said. "You could open up a credit card that you only use for business expenses, and that will solve about 90 percent of your problems."
Recording expenses as they happen — not six months after the fact — can help save time, reduce the chance of accounting errors, and maximize tax returns.
"Trying to remember what you spent money on six or nine months ago is a waste of time when you could easily report that in the moment," said Andrew Mellen, an organizational expert and author of Unstuff Your Life. "A lot of us tell this old story of how this is going to take so long, or how we don't have the time. It's a lie."
Rather than scrounging around for crumpled-up receipts, consider using new technology to make life easier. Expensify is a mobile app that lets you take photos of receipts, then automatically records and categorizes each expense — without the need for you to type numbers in manually. The app is free for individuals, and $5 to $9 a month for groups, depending on desired add-on features. If you're not a fan of taking pictures, you can also link up your credit or debit card to the app, allowing Expensify to record every payment you make with a card.
Likewise, cloud-based service ZenPayroll helps you calculate income taxes every month. The company charges a base fee of $25 a month and automatically calculates all income, state, and federal payroll taxes you owe. It also files a report to the government when you hire a new employee, letting you skip some paperwork, and gives employees access to pay stubs online.
For other big-picture planning, math-minded folks might be happy to track expenses in an Excel spreadsheet. But others should consider using accounting software to save time and effort, Rosen said. Paid options like QuickBooks or Sage 50 and free programs like Wave can help small business owners track expenses, record invoices and payrolls, and generally stay on top of bookkeeping.
Taxpayers who designate a space in their home to use exclusively for business can get money back through the home office deduction.
There are two ways to calculate the deduction. The simplified method is relatively straightforward, worth $5 times the square footage of your home office. Alternatively, you can still use the regular method, which takes into account not only square footage, but also utilities, mortgage interest or rent, and property taxes.
Rosen recommends that business owners who work from home take the time to do both calculations, then choose the deduction that generates the biggest returns. Why? The simplified method is capped at a maximum of 300 square feet — meaning the biggest deduction you could get is $1,500.
"Many people shy away from the home office deduction, or they just use the simple method," Rosen said. "They're leaving money that's owed to them on the table."
One important thing to note, Rosen said, is that whatever room a business owner claims as their home office must be used exclusively for business.
"You can't have any personal activities going on in that home office," she said.
Like the home office deduction, deductions for business use of vehicles can be calculated in two ways: Based on miles driven, at 54 cents per mile, or based on actual expenses — including gas, maintenance, repairs, tires, insurance, depreciation, and other costs.
Business owners should keep careful records of all car-related expenses throughout the year, Rosen said, so they can try out both calculations, and compare the deductions they'd get from them.
One easy way to track travel? Use your phone. MileIQ, a mobile app for iPhone and Android, uses GPS to record how many miles you drove and where you drove to, making it easy to figure out your auto-related deductions at the end of the year. The app is free if you use it for 40 trips or fewer per month, or $5.99 a month or $59.99 a year for unlimited trips.
Small businesses that have positions to fill may want to consider hiring qualified family members. If you employ your own family members, you may be eligible to deduct their wages as a business expense — and in turn, minimize the amount of taxable income you're on the hook for.
Hiring a child under 21, for instance, could save you from paying Federal Unemployment Tax Act taxes on those wages. (The exemptions don't apply if you have a partnership that includes non-parent partners, or if you run an S-corporation.) Hiring a spouse as an employee — but not as a partner — could also exempt you from paying FUTA taxes on those wages.
Business owners could particularly benefit if they're looking for employees to do some light, part-time work around the office.
"It doesn't need to be huge amounts of work, or really important work, but if you just have your child come in and do some cleaning around the office, you could potentially take a couple thousand dollars out of the highest tax bracket," Wheeler said.