Small businesses are immensely important to the world economy, and for American small businesses, here are some tax facts and tips.
Too Much Time Spent Filing
The frustrations that many Americans feel when filing their personal and business taxes for the year are far from individual pains. Research indicates that the tax system itself is inefficient and at times impossible to navigate successfully. On average, small businesses spend $74 an hour on handling, processing, and filing tax forms. $62 is spent on general financial records per hour, $41 gets spent on filing personal taxes, and $39 on processing business purchases. These price tags are quite high for the type of work being done, but it gets even worse when we consider the amount of time businesses spend on these types of activities.
When it comes to 1040 forms, US workers spent on average 26.4 hours just to properly fill out and process their personal tax forms. Businesses are far worse, spending on average 127 hours getting through their 1065 forms for partnership income. Though the costs of filing taxes seem extreme, the costs of coming under fire from the IRS is much greater.
The IRS
The IRS can be a difficult and at times intimidating organization to deal with, and for good reason. Their resources are substantial, with an annual budget of between $11 billion and $12 billion, over 100,000 employees, and 10,000 pages of tax code. More than once the IRS has been accused of highly aggressive collection tactics, prompting the passing of the Taxpayer Bill of Rights, which shifts the burden of proof off of taxpayers and onto the IRS in certain situations.
Looking for Deductions
As the old saying goes, there is no avoiding taxes, so it is important to become an expert at getting through them as possible. Here are a list of great deductions for small businesses that can help you save significantly.
Automobile Related Expenses
$0.575 per mile traveled for legitimate business reasons. $0.23 per mile can be deducted for medical or moving expenses, and $0.14 for service for charitable organizations. Taxpayers also have the option of claiming deductions based on the actual expense of using the vehicle (wear and tear, oil, etc.) instead of using the average mileage rates. See the IRS website for more information.
1st Year Tax Deductions
For a small business’s first year of business, $5,000 can be deducted for things like advertising, utilities, office supplies, and repairs.
Business Entertaining
If you took a prospective client to lunch in order to entice them over with fine dining, it counts as a tax-deductible business expense. 50% of the bill can be deducted when you are out with current or perspective clients, but always make sure that it is properly documented.
Traveling
Here is a big one: 100% of travel expenses outside the United States are deductible, as long as you spent all your time abroad on business. If you travel domestically, many expenses including plane fare, auto and taxi costs, as well as incidental travel expenses, may also offer a deduction.
Interest
100% of interest and balances are deductible if you used credit to finance your business purchases.
Charitable Contributions
If you donated $250 it can serve as a tax write-off, but it must also be accompanied by written documentation from the charity you donated to.
Tax Audits
As bad as filing taxes are, there is something far more stressful. Even worse than filling out tax forms is facing an audit from the IRS. The Defense Tax Group says that your chances of being audited by the IRS are less than 1% if your annual income is under $200,000. Naturally, the likelihood increases with the more you make, but the bottom line is that most of us will probably never have to go through an audit.
However, that fact isn’t a reason not to pay close attention to your tax return. And it certainly isn’t a license to try defrauding the government. Even though the IRS doesn’t audit a large percentage of citizens, there are inevitably the 1 – 2% of people who do get audited. Landing in that group can be a scary, stressful experience—whether it’s your individual tax return that is under scrutiny or the tax documents of your small business.
These mistakes or misunderstandings of tax rules can happen to anyone. However, by double-checking your tax returns and staying as organized as possible throughout the entire process, you will have better chances of dodging an IRS audit. Or, at very least, you will be better equipped to handle an audit if the IRS does flag your return.
If you run a small business, you might set up an eFileCabinet drawer to keep track of employee income and 1099 forms. If you are self-employed, you might scan in the 1099-MISC forms from all of your various clients or payers, to make sure your tax return isn’t torpedoed by one small piece of paper. Other taxpayers might use eFileCabinet to keep a running tally of eligible tax write-offs throughout the year, including receipts and exact monetary amounts.