Small Business: Five Little Steps to Avoid Huge Tax Traps


Who likes paying taxes? Not you? Well, then you need to have a tax plan to deal with them. Most business owners make the mistake of waiting until April to plan for taxes – they want their accountant to “work his magic.” It just doesn’t work like that, though. Tax planning starts in January. But, even then, you’ll want to avoid these common mistakes business owners make:

Not Saving Receipts

The best tax write-offs are for business expenses. In fact, this is the secret weapon all business owners have at their disposal to control their income and keep more of what they make. But, many business owners just don’t think it’s worth saving all those receipts. Sometimes, people get excited when they hear that the IRS won’t pester them for receipts for meal and entertainment expenses that are less than $75.

You might not need the receipt, but you still need some way to document what happened there. You need to know where you went, who you were with, and the business purpose for the meal. Of course, the receipt is the easiest way to prove all of this and keep things well-documented.

It’s going to have everything you need for your taxes, so why bother with extra paperwork? Just keep all of your receipts.

Lumping Equipment With Your Supplies

Equipment is a capital expense that has to be depreciated. Special rules do allow most small businesses to write off about $24,000 for tangible personal property in the year that property was purchased. However, you still need to report these purchases as a capital expense – electing to use this special method of expensing the costs.

If you just expense depreciable business equipment as supplies, the IRS might disallow the deduction altogether and rule that you improperly categorized the property, made an improper election, and may even force you to add the property to your overall investment in the business. The end-result will be no deduction at all. Ouch.

Forgetting About Reimbursables

Small business owners sometimes pay for stuff out of their own savings, using their personal debit card or credit card. While there’s nothing inherently wrong with this, it does need to be properly accounted for. Your company should have an established plan that deducts the expenses, allowing employees to avoid paying tax on reimbursements.

If you don’t keep track of all of this, and substantiate expenses, what you’ll end up with is non-reimbursable business expenses. These can be deducted on your personal income tax return, but only if they exceed 2 percent of your AGI. Even then, you have to report them on Schedule A, not Schedule C.

Getting Auto Deductions Wrong

There are several ways to deduct expenses related to your automobile. The first way is to deduct mileage you drive that’s business-related. The second way to deduct expenses is to deduct actually maintenance and repair costs. You can switch between the two methods, however, if you go from deducting mileage to actual expenses, you can’t depreciate the vehicle using MACRS. You’ll have to take a straight-line deduction which tends to result in a smaller initial deduction on your return.

Being Too Generous

Giving money is a smart way to reduce your tax burden. You get to support causes you believe in, and the IRS doesn’t receive the money. It’s a win-win for everyone but the government. The problem is when you start inflating this deduction beyond what is reasonable. For example, let’s say you want to give $2,000 worth of gifts to your clients.

That’s fine, but you can only deduct $25 per individual. But you figure you’ll do it anyway – so you deduct $2,000. Problem – that amounts to 80 clients. That’s a lot of gifts. Can you say “red flag?” Be smart about your gift deductions and be able to prove everything.

Jeremy S has always been adept at money management. He often blogs about his insights and ideas for successful money handling.

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