There is a lot to manage when you own a small business. On top of everything else, you have to make sure you file all the necessary tax forms on time. You also may not be sure about what tax deductions are available for a small business owner. It's important to talk to your CPA about these issues. In the mean time, here is a brief synopsis.
We have several levels of government and they each want their own tax return. Many cities have their own tax return (e.g. Seattle and Bellevue). You can sometimes be exempt depending on your income level. You may need to file annually or quarterly, again depending on your income level. Even if your city does not have a tax return, they probably require you to obtain a city business license.
The county also wants to tax your business personal property, similar to the property tax on your house. King County requires you to complete a Property Tax Affidavit by April 30th of each year.
The State of Washington also requires you to complete a combined excise/sales tax return. This is due monthly (the 25th), quarterly (last day of month following the quarter), or annually (January 31). Again, very small businesses that are not required to collect sales tax can be put on a non-filing basis.
Finally, the federal government requires you to include all your business activity on an income tax return. If you are a sole proprietor or single member LLC, this activity is included on schedule C of your regular income tax return (form 1040). If you are a partnership or multiple member LLC, this activity goes on a separate tax return (form 1065) which, like form 1040, is due on April 15th. If you are a C corporation or S corporation, the activity is included on form 1120 or 1120S, respectively. Corporate income tax returns are due on March 15 for calendar year corporations. Business owners are also required to complete form 1099 for non-corporate vendors that they have paid more than $600 in the course of the year. These should be mailed to the vendor by January 31 and mailed to the IRS by February 28.
If you have employees, there are additional returns that must be filed at the state and federal level. At the state level, you must file quarterly employment security returns and labor and industry returns. You must also submit new hire forms each time you hire a new employee. At the federal level, you must file employment tax returns (quarterly form 941 or annual form 944). You must also file annual unemployment tax returns (form 940) and W-2s for each employee. Of course, you are also required to deposit payroll tax. There are many other returns that may need to be filed specifically for your industry or under special circumstances. Consult your CPA or tax accountant.
Many people are uncertain about what car expenses they can deduct on their tax return. You are only allowed to deduct expenses relating to the business portion of your vehicle. You can choose either the Actual Expense Method or the Standard Mileage Rate Method.
Which Method is Right for Me?
If you choose the Actual Expense Method, you are able to deduct the business portion of all your vehicle expenses for the year; such as gas, oil changes, tires, repairs, insurance, auto taxes, licenses, washes, parking and tolls, interest on your car loan, lease payments, and depreciation of your vehicle. This method requires you to keep excellent records of your expenses. Once you use the Actual Expense Method with a vehicle, you cannot switch to the Standard Mileage Method.
Alternatively, you could use the Standard Mileage Method and simply multiply your business miles by a predetermined rate, which changes from year to year. Please contact your CPA or tax accountant for guidance about which method is right for you.
Bulletproof Your Deduction
To claim your vehicle expenses as a business deduction, you must be able to answer "yes" to the following two questions on your tax return:
1. "Do you have evidence to support the business use?"
2. "Is that evidence written?"
There are 4 other important questions that you must also answer about the miles driven during the year, regardless of the method you choose:
2. Total Business Miles - in general, these are miles driven from one business location to another;
3. Total Commuting Miles - the automobile expense of going between your home and your office each day are not deductible. If, however, you travel to temporary business locations away from your regular business location, these are business miles, regardless of distance;
4. Other Personal Miles - everything else, such as trips to the doctor, driving your kids to school, charitable miles, etc.
Most importantly, the IRS requires that you keep adequate records to support your business deductions and that these records are updated at or near the time of business. We recommend keeping a small notebook in your car to record your business and personal travel daily by recording the date, beginning and ending odometer readings, and the purpose of the travel.
One of the most popular and most enjoyable of business deductions is the business meal deduction. You are allowed to deduct 50% of qualified meal expenses. There are several important steps you need to follow:
1. The meal must be arranged with the intent of discussing business. Your companion must reasonably expect a business reason for the meal.
2. You must discuss business before, during or after the meal.
3. The meal must take place in surroundings conducive to doing business.
Bulletproof Your Deduction
In an audit, you must be able to answer the following questions about the meals you deduct as a business expense:
- Who was entertained and what is the business relationship?
- Where did the meal take place?
- When did the meal take place?
- Why did the meal take place? Be brief but very specific.
The answers to these questions should be recorded in a timely fashion, either on the actual receipt or in your business expense log.
Home Office Deduction
You have probably wondered if a home office is really worth deducting. The answer is very likely yes! Of course, you should consult your CPA or tax accountant in order to make the best decision for you.
Your home office is deductible if any one of the following requirements are met:
1. It is your principal place of business or where you perform a substantial portion of your administrative or management activities;
2. It is where you meet and deal with your clients, patients, etc;
3. It is a separate structure not attached to your home; i.e. an artist's studio, a carpenter's workshop, etc;
4. You use the space to store inventory.
Most importantly, your home office must be used exclusively and regularly for your business.
What Home Expenses are Deductible?
The most common way to allocate expenses to your home office is the square footage method. It is based on the total useable square footage of the house. For example, if you have 2,000 usable square feet in your home, and your home office is 300 square feet, your home office allocation is 300 / 2,000 = 15%.
In this scenario, you would be able to deduct 15% of your mortgage interest, property taxes, home insurance, rent, utilities, repairs, home depreciation, certain home improvements, etc. If you meet clients in your home, you would also be able to deduct 15% of your yard maintenance and house cleaning costs.
Bulletproof Your Deduction
1. Take a yearly, dated picture of your home office to establish that it was used exclusively for business. (Remove any personal items first!) If you are audited, you will be able to prove you were eligible for the deduction in the past.
2. Keep records of the square footage of your home and home office. If you do not have blueprints, draw a picture showing measurements of your home and office.
3. Keep a calendar including guest to your home office. It does not need to be formal, but it should include your guest's name, date of the visit and the purpose.
4. Keep a work activity log for time spent in your home office. This will help you prove that you used your home office regularly.
Of course, any expense which is paid or incurred during the tax year to carry on a trade or business is generally deductible. There is an overriding requirement that all such expenses be ordinary and necessary. Thus, supplies, cost of goods sold, office expenses can all be deductible. Certain expenses must be deducted over time (e.g. equipment, building improvements, purchased goodwill). Talk to your CPA or tax accountant to determine all of the available deductions for your business.