Six tax saving tips that will help your business
by Raul Valdivia
There are many facets to running a business, but the one area that arises in every business owner’s mind is taxes. Specifically, the question is how to operate the business while paying the least amount of taxes possible. This article will touch on six areas that will help you minimize your tax burden.
1. Choice of Entity
Choosing the right type of entity under which to run your business is a very important decision regarding taxes and protection of your personal assets. The choices available are sole proprietorship, partnership, corporation (S Corp or C Corp), and limited liability company (LLC).
The income and expenses for a sole proprietorship are reported on Schedule C and any profit of $400 or more from the business is subject to self-employment tax as well as your ordinary income tax rate. The net loss from this type of entity can be used to offset any other ordinary income reported on the 1040.
Partnerships and S Corps are what the Internal Revenue Service refer to as “flow through” entities. Income and expenses are reported on Form 1120S (S Corp) or Form 1065 (partnership). These two entity types do not pay taxes on their profits. The profit flows through to the shareholder(s) in an S Corp and partners in the partnership and taxed at their ordinary income tax rate on their individual tax return. The losses also flow through, but there might be some limitations to how much you can deduct. The advantage of the S Corp is that its profits are not subject to self-employment tax. Depending on the type of partnership you choose, the profits from this entity are likely subject to self-employment tax.
The C Corp pays taxes on its profits and income and expenses are reported on Form 1120. This is a legal entity separate from its owners (shareholders). Shareholders are taxed if the corporation issues dividends. This is where “double taxation” occurs.
An LLC may be classified for Federal income tax purposes as either a sole proprietorship, a partnership or a corporation. A domestic LLC with at least two members is automatically classified as a partnership unless it elects to be treated as a corporation. This is done by filing IRS Form 8832 and provides the advantages of a corporation. The main advantage of choosing an LLC is that members normally have no personal liability for the debts and obligations of the company.
2. Home Office Deduction
Most business owners shy away from this deduction because of the scrutiny exercised by the IRS in recent years. But if done correctly, you could reduce your taxable income. Remember that the office space must be used exclusively for your business and that you have no other location where you substantially conduct administrative or management activities of your business. You can deduct the business percentage of mortgage interest or rent, property taxes, insurance, utilities, and also depreciate part of the purchase price of your home.
If you frequently use your vehicle to conduct business, you can deduct the cost of the miles driven. The key is to keep a good record of the miles traveled. Note the date, destination, and miles. The miles could add up and the current standard mileage rate for 2012 is 55.5 cents per mile.
4. Hire Family Members
A good idea is to hire your child to work in your business. You can deduct the wages and other payroll costs to help reduce taxable income. And if the gross wages amount to less than the standard deduction for 2012 ($5,950), your child will not have to report the income.
The cost of equipment used in your business must be depreciated and deducted over several years. But the IRS allows the Section 179 Expense for equipment placed in service during the tax year. You can deduct the full cost of newly purchased equipment up to certain limits. Also allowed is Bonus Depreciation. For 2012, you can deduct 50% of the cost of equipment placed in service during the tax year. The remaining cost must be deducted according to depreciation rules.
6. Organize Your Records
You cannot overlook the importance of a good accounting or bookkeeping system. Good record keeping will help you not miss deductions that could get lost otherwise, and help substantiate every deduction to which you are entitled. It will reduce your tax preparation costs and make your tax preparer a much happier person.
About The Author: Raul Valvidia
Raul is the owner and President of the public accounting firm Raul Valdivia, CPA, a business of Valdivia Financial, Inc. located in Salem, OR. He is a Certified Public Accountant and a Certified Fraud Examiner with 22 years in the accounting profession, including eight years as a grants manager/accountant with a nonprofit organization and over eleven years as an auditor with the Oregon Secretary of State Audits Division. The firm specializes in assisting small businesses get on the right track regarding their accounting, tax, and bookkeeping needs, as well as business consultation.