That dreaded time of the year is almost upon us: tax season. While tax season can be a financial headache for many small business owners, it’s especially difficult for newly minted entrepreneurs.
Filing errors can affect a firm’s financial health for months and sometimes even years to come. Here are a few tips to avoid any missteps before you file.
Saving money by contributing to retirement plans …Setting aside money for future retirement plans while dealing with current, day-to-day money challenges may seem unrealistic, especially for new businesses or self-employed entrepreneurs.
However, investing in a pension plan enables business owners to reduce their tax payout. Why pay Uncle Sam, when you can simply invest those funds in your future and that of your employees?
Although popular retirement plans like the 401(k) are often used to reduce taxable income over the year for employees, who can contribute pre-tax earnings to the retirement fund, a SEP IRA (Simple Employee Individual Retirement Arrangement) can also help small business owners increase their tax deductibles, says Steve DeFilippis , an enrolled agent and owner of DeFilippis Financial Group.
“If you have a profit, you can contribute to a SEP which will lower your tax liability,” explains DeFilippis. “The SEP can be established now and funded anytime up to the extension deadline (October 17, 2016).”
A SEP IRA lets owners set aside up to $53,000 or 25 percent of their income (based on their first $265,000 of income for years 2015 and 2016), and lowers the amount of income they have to claim, and therefore, the amount of taxes owed. The process provides both owners and hard-working employees with retirement benefits and lowers end-of-year tax bills.
Meanwhile, all is not lost for businesses that can’t afford to contribute to a SEP-IRA by the 2016 deadline, says DeFilippis. “If the small business owner doesn’t have the money now but will before November 17, 2016, they can file an extension for their tax return and that extends the time to fund the SEP. There’s no guarantee that the extension will be approved, but you should still try.”
Keeping records up to date …The easiest (and sometimes most overlooked) way for companies to maximize the deductions is to be organized ahead of time.
“Not keeping good records is the most common failure,” says DeFilippis. “Getting the most out of your deductions means you have to have good records and stay up-to-date all year round, not just during tax season. Also, if you have good records and are audited, surviving the audit will be a breeze and won’t harm future returns”.
Indeed, a new industry has sprung up to help small businesses and startups stay accountable throughout the entire year. Temporary financial advisors can work on a weekly, bi-weekly or even quarterly basis, and several employment offices now place temporary or part-time financial staff for this very reason.
“It’s not always possible to hire in-house counsel, but it’s important to make regular appointments all year round, not just during tax time, or hire temporary staff,” adds DeFilippis. “Avoid losing any money or mistakes by seeing someone routinely.”
The best offense is the best defense …Although all of these things can help businesses survive the most hectic tax season, it’s more important for businesses to think ahead before they even get started. This, DeFilippis says, will save a lot of headaches down the road.
“Many times my clients go out and incorporate right away when incorporating might not be necessary,” explains. “When you incorporate, you create many administrative actions (ex. filing payroll tax returns, a separate corporate income tax return, etc.) and the costs associated with them. If liability exposure is a concern, a single member LLC can address that and keep the tax filing simple (Schedule C as part of their 1040).”
Consulting an accountant before even launching a business can be an entrepreneur’s best tax strategy. “Many times people set off in business and then decide it isn’t for them and they go back to being an employee,” DeFilippis says. “I think it is best to minimize the cost and administrative time and concentrate on what will make the business profitable.”