Wishing for a tax do-over for 2014? Self-employed businesspeople staring at envelopes full of receipts might wish for a financial makeover.
Your bread is baked for 2014, unless a financial professional can help you, but taking the right steps now could prevent snafus on your 2015 taxes.
We asked three Delaware-certified public accountants for the top 10 steps entrepreneurs can take to prevent a tax meltdown when January 2016 rolls around.
1) Get organized: Try QuickBooks or another accounting program to track your business expenditures. “When you have documents that are not organized in QuickBooks or accounting software, things can get muddled or forgotten,” said Amanda Yantosh of Horty & Horty.
2) Use a notebook, calendar or phone app to track every business mile you drive. The IRS allows you to deduct 56 cents per mile in 2014 and 57.5 cents per mile in 2015—if you keep sufficient records. That means taking your odometer mileage reading at the beginning of the year and keeping a mileage record for every business trip you take, said Jordon Rosen of Belfint, Lyons & Shuman. Show where you’re going, why you’re going, and the mileage. At year’s end, take another odometer reading to see how many total miles you’ve driven.
Then, you have two choices: You can take the standard per-mile deduction, or you can figure out the percentage of miles driven for businesses and deduct a percentage of your actual automobile expenses (leases, gas, tires, insurance, repairs).
3) Health savings accounts are a boon for sole proprietors because they allow individuals covered by high-deductible insurance plans to receive tax-preferred treatment of money saved for medical expenses. “You put the money in; you get a tax deduction. It can grow, and, when you have medical expenses, you can take it out tax-free. There’s no other account that does that,” said Chris Smith of Gunnip & Company.
The money can accumulate through your lifetime, and you can use it to pay health expenses in retirement.
4) If you hire any employees, consider hiring a payroll processor, too. Having someone else do payroll frees up your time, and it can save you money in the long run. “I know, with small entities, it’s often a price issue,” said Smith. “But sometimes the headaches can
outweigh what the cost issue is because there are some forms that can be missed. Let’s say their unemployment rate changes, and they didn’t know that
and didn’t pay. They could come back and have to owe a little bit of interest and penalty on it.”
He said the best time to switch payroll administrators is now—the beginning of the year.
5) Reconcile your checking account monthly. It sounds simple, but CPAs say many sole proprietors keep their bank balances in their heads.
6) If you entertain a client, keep good records of whom and when and how. You can deduct part of your meal and entertainment expenses, but you’ll need more than an old receipt.
7) You may consider using a room in your house or even a part of a room as a dedicated office and taking a deduction for its use. Using the simplest method of figuring a home-office deduction, you can deduct $5 per square foot up to 300 square feet. Three caveats: The space must be used exclusively as an office; when you sell your house, this deduction could complicate things a tad, if you do not use the simplified method; and it probably does increase your chances of an audit a little bit, Smith said.
8) The Section 179 deduction is a gift to small-business owners, aimed at stimulating the economy. Rather than laboriously dividing yearly depreciation of an asset, owners have been allowed to deduct the entire cost of an asset in one year. The deduction has ranged from $25,000 to $500,000 in years past, but, at press time, Congress had not passed a bill outlining the deduction for 2014 or 2015. Even with the economy starting to budge on its own, CPAs were hopeful that Congress would pass some deduction on a retroactive basis.
9) Hire the kids: Sole proprietors can employ their own children for jobs that they are capable of doing and pay them a salary that’s commensurate with what they do. That could be cleaning your office or raking the leaves that are blocking your clients’ entry to the property. “If you can hire your children, you can save on taxes and keep the money within the family,” Smith said. “It definitely has to be a duty the child can do, and it has to be a legitimate job.”
10) Look at your numbers: When 2015 is coming to a close, take steps to balance your income with deductions. If it’s been a lucrative year for your business, think about what equipment you’ll need in 2016, and consider buying assets before Dec. 31 so you can balance that 2015 income with deductions.