September 20th, 2011 Amanda Han CPA (Taxloopholes.com Tax Strategist)
Over the past few years, I noticed a growing trend that for a lot of start-up businesses, people try to save money by preparing their company tax returns on their own. How hard can it be, right?
Typically, it’s not until after spending 20 or more hours trying to figure out the returns, that people come to the realization that the tax laws from a business standpoint is not as clear cut as it may appear to be.
It’s a fact, that businesses get the best tax breaks from the IRS. That’s because businesses play a vital role in our nation’s (and the world’s) economy, through producing goods, providing services, and, perhaps most important, employing people to do the work! The government recognizes this, and that’s why businesses get the best tax breaks.
As a W-2 wage earner, your paycheck is taxed before you get it. You’re in what we call the Earn-Tax-Spend cycle. A business owner, on the other hand, has a different cycle – Earn-Spend-Tax. Instead of paying tax first and trying to live on what’s left business owners pay their own expenses first, and share part of what’s left with the government.
Even a small, home-based business is entitled to use the Earn-Spend-Tax cycle, and that’s one of the best reasons I know to start a business. What if you could transfer a large portion of your after-tax expenses to pre-tax expenses? You would benefit by having your money go further, plus you’d be paying less tax, because after you paid out all of those pre-tax expenses your income would probably be lower than it is now, which would mean your taxes would be lower, too!
There are so many intricate details when it comes to the tax law for businesses. For example, did you know that not all tax deductions are created equal? Did you know that your business travel expenses can save you as much as 50% in taxes or save you Zero taxes? You may be surprised to hear this but there is actually a Right way and a Wrong way to take your tax deductions. One of the most common mistakes we see is tax deductions being taken in the wrong place. By misclassifying a business travel and putting it in the wrong line or wrong form on the tax return, this can affect a taxpayer up to an average of a few thousand dollars in tax refunds! We all know that as new business owners, cash flow is essential to what is needed for the business to succeed so it is imperative that the tax returns are done correctly so as to not overpay the IRS.
Business tax returns are undoubtedly complex. They include a vast number of rules and options that change every year and sometimes change part way through the year. For example, the recent health-care law includes a new, temporary tax credit for small businesses that cover at least 50% of the cost of health insurance for certain employees.
Another new one is that if you make purchases of new equipment or assets for your business, you may be able to take advantage of a temporary 100% bonus depreciation and write off the entire purchase price of the new asset in the same year! For example, if you buy a brand new SUV for $40,000, you may be able to take a tax deduction of up to $40,000 this year if you used it 100% for business. At a federal and state tax rate of 40%, this can mean an additional tax refund of $16,000 back in your pocket at the end of the year.
For those of you who have been running your business out of your home, you can deduct a percentage of your rent or mortgage interest, utility bills and repairs all of which can increase your tax refund thus providing your business with additional cash flow. On average, the home office deduction creates over $3,000 each and every year to the taxpayer as a write-off.
For those of you who are considering whether to do your own business tax returns, ask yourself this, “Am I knowledgeable in the tax law to know that I have taken advantage of all the tax loopholes available to me as a business owner?” Don’t underestimate the complexity of the US tax codes. Also, don’t underestimate the power of a great tax advisor. A great tax advisor is someone who helps you to plan ahead to take advantage of all the tax saving opportunities you now have as a business owner.
If you have any questions about your specific tax and financial situation, feel free to contact us at TaxLoopholes at (877) 975-0975 and we will help bring clarity to your tax planning!