March 15 is just around the corner. Which begs the question: What don't you, as a small-business owner, know—but should know—about filing your taxes?
With that goal in mind, we asked Mike Scholz, tax director at
Wegner LLP CPAs & Accountants—an accounting firm based in Madison, WI, that focuses on individuals and small businesses—for help in identifying the top 10 things that small-business owners don't know about their taxes.
1. Classify your workers correctly. Scholz cautions any small-business owner to beware paying staff as independent contractors. “Worker classification (employee vs. independent contractor) will be a hot topic for the IRS this coming year,” he says. “The IRS recently released training materials for their examiners, so make sure you are classifying workers correctly. Last fall the
IRS announced a settlement program for those businesses that wish to re-classify their workers. Under this program, there is substantial relief from potential past payroll tax liabilities for eligible employers that treat workers as employees going forward.”
2. Late fees can be steep. So be sure to avoid penalties by paying the company payroll taxes and filing tax reports on time. “The IRS penalties for late payments and late filings are horrendous,” says Scholz. “The IRS is serious about collecting all delinquent payroll taxes. The IRS will pierce the corporate veil if the corporation does not pay payroll taxes and go after the responsible officer's personal accounts.”
3. Send out your 1099s. There’s a new disclosure this year related to 1099 contractors to beware of, says Scholz. “Business owners will see two new questions on their tax forms this year,” he says. “The first asks: Did you make any payments in 2011 that would require you to file Form(s) 1099? And the second follows up with: If 'Yes,' did you or will you file all required Forms 1099?” The point is that the IRS is making a rather blatant reminder that Form 1099s should have been sent to people or companies they've paid money to—particularly to individuals, LLCs and partnerships that were paid more than $600 for services.
4. Tax return extensions can be your friend. “The extension of your business return also extends the time to make company profit sharing contributions for the year,” says Scholz. For example if you extend your 2011 S Corporation return until September 15, 2012, you also get an extension to make your 2011 profit sharing contribution to the same extended due date. Plus, the tax filing extension is automatic (no reason needed) just file the one-page form.
5. Don't forget to see if you qualify for the small-business healthcare tax credit. “For 2010, only 15 percent of small businesses claimed this tax credit, so it's worth looking to see if the business qualifies for it in 2011,” says Scholz. “The tax credit is generally available to business owners who pay for at least half the cost of employees' insurance coverage, have fewer than 25 employees and pay salaries that average less than $50,000 annually. You can still amend 2010 returns if the credit was missed on the original return.”
(Read more on healthcare.)6. There are tax credits available for hiring veterans. You can qualify for a credit that's worth up to $5,600 for hiring a long-term unemployed veteran, $2,400 for hiring a short-term unemployed veteran and $9,600 for hiring an unemployed veteran with a service-related disability, says Scholz. “Note that these veteran new-hires need to be certified by state workforce agencies,” he says. “The IRS is working on streamlining the paperwork process to expedite the certification process once a veteran is hired.”
(Get more tips on hiring for targeted tax credits.)7. Take advantage of current year net operating losses. Current year net operating losses (NOL) can be carried back two years and forward 20 years. “These loss carrybacks can generate tax refunds in those past years where the business paid tax," says Scholz. “There are strategies to increase an NOL through equipment expensing elections (Section 179 or bonus depreciation). Many businesses have large NOLs generated during economic downturns. Proper planning will ensure the best tax result, so that NOL benefits are not allowed to expire.”
8. The IRS can request copies of your QuickBooks files. “The IRS has been training revenue agents on how to use QuickBooks and instructing their field agents to request your QuickBooks company file as a part of the audit,” says Scholz. “When a QuickBooks file is provided, it includes not only the current year records but all years' transactions included in the software’s data file. We suggest looking into technology solutions that can block those tax years not under audit to minimize records available to a snooping IRS agent.”
9. Not all business meals are subject to a 50 percent disallowance. “Generally, only 50 percent of business meals and entertainment expenses are deductible,” says Scholz. “There are exceptions which allow a 100 percent deduction for meals as follows: trade-show costs, conferences and receptions that are open to the general public. Employer-provided benefits that are relatively infrequent, minor and administratively difficult to track, such as doughnuts, picnics and costs associated with the company holiday party as well as the summer picnic, are also 100 percent deductible. “Another meal that is 100 percent deductible includes where the business is reimbursed for the expense,” says Scholz. “For example, if a business takes a client to lunch and then bills the client for that lunch in a separate line item on the invoice, then the business can fully deduct that meal.”
10. Don't rely on your credit card statements. The statements alone are not adequate substantiation of a business expense. “The IRS requires that any legitimate deductible business expense must be ‘both ordinary and necessary,’" says Scholz. “An ordinary expense is one that is ‘common and accepted’ in your specific trade or business type, and a necessary expense is one that is also ‘helpful and appropriate’ for your trade or business.” But beware that having an expense item on a card statement for purchases made at Office Max or Office Depot doesn't automatically qualify the purchase as a legitimate business expense. “The IRS suggests that businesses keep the original store receipts that itemize the details of the items purchased,” says Scholz.
Previous article: 3 Most Common Mistakes Made When Filing Business Taxes | Next article: Top 5 Tools for Filing Business TaxesDarren Dahl is an independent business writer, who regularly writes about entrepreneurship for Inc
. magazine (where he is a contributing editor), The New York Times
and AOL. He has also worked with several high-profile authors, such as Keith McFarland on The Breakthrough Company
, as well as intellectual property experts Mark Blaxill and Ralph Eckardt on their book, The Invisible Edge
. Photo credit: iStock
