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5 Most Common Reasons Small Businesses Are Overpaying in Taxes
November 22, 2016
Are you overpaying in taxes? Overwhelmed by complicated tax codes and the daily demands of running a business, many business owners are unwittingly giving up hundreds or thousands of dollars by overlooking tax deductions and pre-tax deductions, or failing to keep the careful required records. Here are a few accounting tips that can be improved to make the next tax season a little less daunting:
Starting up. Many business owners are unaware that the costs of getting their business up and running can be deducted once you’re off the ground. As soon as your company is making money, you are permitted as a business owner to look back and tally up any costs associated with launching your business, such as a previously-purchased computer now used for work, or a continuing education course that helped prepare you for starting a company. The only catch is that there must be adequate records that can verify the purchase and link the expense to your business.
Missing out on pre-tax deductions. Commuters can use pre-tax dollars to pay for their commute and save on their taxes. With every deduction made by an employee, the employer also saves by reducing their payroll taxes. TransitChek allows commuters up to $255/month for transit and $255/month for parking, which, as we all know, is a blessing in a car-centric city like Los Angeles. Through TransitChek, employees have reported an average savings of $2,450 each year, while employers stand to save around $470 per employee. Offering pre-tax deductions through programs like TransitChek saves money that would otherwise go to taxes while also helping companies attract new talent. Some states have actually begun requiring some employers to offer pre-tax benefits to their employees, so offering TransitChek allows them to remain in compliance with the law while still saving money.
Meeting clients and associates for meals or entertainment. Business owners are often uncertain about what can be deducted, as a client meeting can also run over into socializing. To avoid missing out on these deductions, a simple rule can be applied: if the meeting is serving a business purpose – introducing a client, pitching a new project, etc. – it can be counted as a company expense. The other major reason these costs fall through the cracks is a failure to hold onto receipts. Enormous amounts of money can be saved by implementing a simple system for better record keeping: keep a day planner dedicated to these kinds of outings and note the business-related purpose and people present at each event or meeting you plan to claim as a deductible. A bank statement will do for expenses under $75, but it’s better to keep the habit of filing away a copy of each receipt.
Working from home. Recently, as more people have started working remotely from home, the IRS has allowed a home office deduction of $5 per square foot, limited at 300 square feet of office space. Business owners who work from home but aren’t claiming a home office also often lose out on business mileage expenses, as every trip that starts from home is then counted as a non-deductible commute.
Employee expenses. Reimbursements paid to employees can be counted as deductions, as long as, once again, precise logging and record keeping are the standard. Employees should be given a specific window of time in which to claim their own business expenses and substantiate them with receipts and notes on why the expense was necessary.
The most common reason businesses overpay in taxes is a lack of precise accounting, but working with a tax professional from a reputed financial management company can help business owners find even more ways to save by developing tax strategies that take both the present status of your business and its future trajectory into account. A consultant can help you identify and integrate applicable pre- and post-tax deductions, and develop a system of best practices for keeping adequate records to get money back.