As business owners, we have a lot of control over business expenses. Therefore we can also dictate our tax deductions. In order to understand and minimize our tax obligations, several factors must be considered.
First is entity type. In Florida, only c corporations are required to pay income taxes. LLCs and S corporations do not have this obligation. For tax purposes, most LLCs are classified as partnerships, or disregarded entities. This allows the LLC to avoid paying income taxes. In rare cass, an LLC is also incorporated. In Florida, this requires the business to pay an income tax of 5.5% or the 3.3% alternative minimum tax. Owners of the LLC are also protected and pay no income tax on the personal income gained from the business. Florida has a pretty low tax obligation, making it a good place to start a business.
Also, one must be aware of the alternative minimum tax. The IRS calculates the alternative minimum tax separately from regular tax liability and with different rules. Certain expenses, such as property taxes, that are deductible under the regular rules are not deductible under the AMT. Deductions might not matter if you end up having to pay the AMT regardless. The takeaway: Consult a tax professional. Tax law is complicated, and always changing. Waiting for a once a year meeting with our accountant may not leave us with enough time to act on opportunities to save, or react to new obligations.
Relevant Taxes
In order to to make the most of our tax deductions, we have to know the taxes that apply to us. The answer depends on where we do business, what we sell, and whether we’re incorporated.
We’re gonna have to collect a sales tax from customers on each transaction, failure to do so may result in penalties. Before I set this in stone I want to confirm with a second source, but since we’ll be selling mostly online I’m pretty sure we’re only responsible for the state sales tax and not that of any county.
Next is the franchise tax. Most U.S. states require businesses to pay franchise taxes if they have a “nexus” or a presence there. Florida imposes a franchise tax rate of 5.5% of net income, with the first $5,000 of net income being exempt. This link is saying we are exempt for the first $50,000 of net income so I don’t which to believe. Also on that page are qualifications for filling the franchise tax exemption and links to other tax credits worth looking at.
Employment taxes. Once we hire employees, we are required by FICA to withhold income taxes and employees’ shares of Social Security and Medicare. As a business we pay the employer’s share of FICA, plus state and federal unemployment taxes while your employees will pay these on an individual basis each month, via paycheck withholdings.
We may required to pay excise taxes (sin taxes), which affect a wide array of activities. Common example of excise tax are those required on fuels, tobacco, and alcohol. Excises taxes are included in the listed price of the good or service. I don’t think excise taxes will apply to us.
A few states tax the total gross revenue of a company, regardless of the source of revenue. Florida does charge this tax. However if I’m reading this link correctly the tax only applies the sale of utilities, meaning apply to us.
Required Items for Taking Deductions
A bookkeeping system. Our tax accountant will need a balance sheet, an income statement, and a cash flow statement. If we bought, sold, or disposed of any capital assets our accountant needs to know.
Receipts and other proof of expenses. Storing and categorizing these digitally is preferred. Some accounting solutions also store receipts.
Certain expenses require specific records. If we want to write off miles driven for business purposes we’ll need to track mileage in a diary or logbook.
Ways to Save
File on time. (but ask the IRS to waive penalties if you don’t)
Late payment penalty: usually ½ of 1% of unpaid taxes, per month.
Interest on taxes owed: the federal short-term rate plus 3% with interest compounding daily
Late filing penalty: usually 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty starts accruing the day after the tax filing due date and will not exceed 25% of unpaid taxes. This is the big penalty–always file on time or file for an extension.
TAX-RELATED DEADLINES
Form
Due Date
Mail 1099s to your vendors and independent contractors
Before Dec. 31st
Fille payroll forms
Mail payroll forms (W-2s, W-3s, 940, 941)
1099-MISC forms for any contractors paid $600 or more
January 31st
Partnerships & S corporations file federal & state income tax (or extension)
Form 1065 or 1020S, respectively.
March 15
Submit annual return summary to IRS
Form 1096
February 28
Treat yourself to new equipment or improvements. Typically the costs of buying new business equipment is deducted by claiming a depreciation allowance over 5-7 years. However, section 179 allows you to accelerate the deduction to get the entire tax benefit the year you started using new equipment. Before we can take advantage of this deduction we need to know its federal limits.
For the tax year 2015, the IRS allowed deductions up to $25,000 under section 179. Congress often adjusts this at the last minute to favor the taxpayer: in 2014 they raised the limit to $500,000.
179 deductions for any taxable year can’t be more than your business income. We can’t use the 179 deduction to spend our way out of paying taxes. But if we have expenses left over, we can carry them over to the next year.
Eligible expenses include: equipment and machines, such as computers, office furniture, personal vehicles used for business, vehicles used exclusively for business, software, etc.
Ineligible expenses include: land and buildings owned, including parking area, Used equipment, etc.
Payroll taxes are expensive, and only go up with each new employee added to the roster. Because payroll taxes are proportional to an employee’s income, we’ll pay more each time an employee gets a raise or bonus. Consider adding employee benefits instead. Contributing to insurance premiums, an HRA, 401(k)s, setting up employer-owned health reimbursement accounts and health savings accounts, contributing to a company gym (on-site), or even bus or parking passes will spare us some income tax, FICA, Medicare, and unemployment taxes.
Tax-deferred retirement accounts are an excellent investment vehicle, and maximizing retirement contributions help lower our tax burden. As an employer, 401(k) contributions can help out in several ways. We can claim deductions for matching employee contributions to 401(k)s. Contributing to individual 401(k)s with each paycheck will lower taxable income. We should make it a point to contribute the maximum allowed to our 401(k)s this will benefit us now, and in the future. Individual retirement accounts, or IRAs come in a few different forms. We have until April 15th to make contributions to any kind of IRA for the previous tax year. Traditional, Roth, and SEP IRA’s all have their advantages and are contribution to them can be tax deductible.
Contributions to SEP IRA’s have much higher limits than the traditional or Roth IRA’s. These limits are 25% of compensation or $53,000.
Donating to IRS approved charities will lower tax obligations. We’ll get the tax deduction no matter what but some cool ways to take advantage of this credit are making donations to compliment employee volunteers days, matching employee contributions to charities of their choice, or sponsoring a community 5k (great PR opportunity).
Home-office deductions offer significant savings for us. We can write off square footage at the crowbar because we use it manage business and there is no other fixed location where we conduct management or administrative activities. To write off a home office, it must be used exclusively and on a regular basis. It doesn’t have to be an a entire room, but the area must be used only for work, and the boundaries must be clear. However, we use the crowbar to store inventory, so the rules are a bit more flexible.
The home office deduction is actually several separate deductions. The deduction is based on the percentage area of the crowbar dedicated to business when compared to the total area of the crowbar. If we claim 10% of the area dedicated to business we will be able to deduct 10% of the rent and utility bills. Alternatively, we can deduct $5/ft2 up to 300 ft2 or $1500. If our deductions exceed $1500, or our office space is bigger than 300 ft2 we can go use the traditional route.