Don’t let tax season be a dark force that looms over your business until mid-April, overshadowing the positive energy you should be using to implement new ideas, outperform last year’s sales, launch new products, and reach new customers. You could let a seasoned Jedi master file for you like 84% of all business owners, but are you ensuring the best outcome for your business? Now is the perfect time to review what took place from a tax perspective in 2015 and start planting the seeds for effective tax planning in the current year. It may seem as daunting as growing crops on Tatoonie, but Yoda is here to share his wisdom on efficient small business tax planning.
“Efficient small business tax planning you must learn and better business outcome you will have.”
Updates for 2016
Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Congress effectively changed a number of important tax filing deadline requirements for businesses, including:
- Partnership returns are due no later than March 15 for calendar year businesses, or on the 15th day of the third month following the close of the business tax year for non-calendar year entities. This deadline change is a month earlier than previous years.
- C corporation returns are due April 15 for calendar year businesses, or on the 15th day of the fourth month following the close of the business tax year for non-calendar year entities. This deadline change is a month later than previous years.
- S corporation tax returns remain due on March 15, or the third month following the end of the business tax year for non-calendar year companies.
- C corporation returns with a tax year ending June 30 are due September 15, through 2025. After the 2025 tax year, the due date shifts to October 15.
- Extensions are still available up to six months past the initial filing deadline for most businesses, although penalties may be applied.
In addition to shifting filing deadlines, the IRS now has an extended audit period of six years, up from three in previous years. Take note!
Deduct or Do Not Deduct. There is No Try
One of the most pressing tax planning questions to face business owners is to deduct or not deduct certain expenses. According to the Journal of Accountancy, business deductions are defined as expenses that have been used to generate income. While that definition leaves a lot to be desired, there are a handful of common expenses that can be written off against business income each tax year, including:
- Startup costs, up to established limit.
- Inventory expenses
- Office supplies, including furnishings and equipment
- Mileage and travel expenses
- Meals, gifts and entertainment for clients or customers, up to established limits
- Retirement plan contributions for owners and employees
- Software purchases or subscriptions
- Insurance premiums for owners and employees
To ensure your business receives the best possible tax outcome, it is crucial to keep organized records of all business-related expenses throughout the year and consult a tax advisor if an expense seems questionable in terms of deductibility.
As of 2016, smaller businesses, or those with 51 – 99 employees in the previous year, are included under expanded healthcare law, creating the need to provide individual health-care coverage compliant with the Affordable Care Act (ACA). According to the Congressional Budget Office, the estimated cost associated with individual health care coverage averages $5,800 per year, per employee, which may create a degree of sticker shock for smaller organizations. Despite the high average cost, it is imperative that companies comply with mandated healthcare coverage requirements in order to avoid penalties up to $2,000 per employee.
In addition to coverage requirements, the majority of small businesses are now required to keep close track of employee data, including hours worked, benefits offered and total number of full-time equivalent workers, all of which is reported back to the IRS and employees. To avoid tax penalties related to ACA requirements, business owners should plan to work with their human resources team or implement tracking software that maintains the necessary data early in the year.
Know Your Employees
In the realm of small business, it is common practice to utilize the services of freelance workers or contractors to outsource certain business needs. Paying individuals on a 1099 basis helps reduce the costs associated with Social Security and Medicare taxes, as well as healthcare coverage requirements. However, freelancers and contractors must be truly independent. Under IRS guidelines, 1099 workers cannot be treated the same as W-2 employees in terms of the scope of their work or how much control the company has over their time. Because the IRS is focusing more on how workers are classified in 2016, it is necessary to keep the often blurred line between freelancer and employee painfully clear.
Learn from the Past
Tax season is an inevitable part of doing business and earning an income, but your responsibilities under applicable tax laws don’t have to be a cause for panic each and every year. As your business begins the process of organizing and filing your 2015 taxes, take note of what went right and what didn’t go as planned. To plan efficiently for the 2016 tax season, spend some time with your tax advisor and your 2015 business tax return to discover where additional deductions can be applied or where course corrections can be made. The implementation of tax saving strategies early in the year paves the way for smoother tax filing this time next year.
Stay tuned from more wisdom from small business Yoda. Much to learn you still have.