This tax season, small businesses all around Colorado are looking for ways to reduce their taxes. That’s why we reached out to Jeanne Bolz, who runs Bolz CPA in Fort Collins and has helped business owners with their taxes for over 25 years. This Elevations business banking member also volunteers for the Larimer County Small Business Development Center advising new small business owners. We asked Jeanne for tips* that could help small businesses reduce their taxes, and here’s what she said:
1. Keep your business accounts separate from personal accounts.
Always maintain a dedicated checking account, debit card and credit card for your business only. Even the most organized business owners risk losing a receipt or overlooking deductible expenses if they use their personal bank accounts and credit cards.
2. Know what is deductible for your business.
Contrary to popular belief, there is not one master list of deductible business expenses. What is deductible for one business may not be deductible for another. The IRS uses the “Ordinary and Necessary” standard to make this determination:
- Is it ordinary for your type of business to buy this item?
- Is this item necessary for your business to generate income?
To illustrate this standard, let’s look at the work of a hair and makeup artist. Purchasing hair supplies and makeup are a normal part of their business and necessary for earning income. For an ice cream shop owner, using hair and makeup supplies may be part of their personal care routine for work, but they are neither ordinary nor necessary for the ice cream business.
3. Be careful when deducting mixed-use expenses like a car and home office.
Mixed-use items are those you use for personal and work needs, and the risk exists of claiming overly liberal deductions here. Since this category has potential for abuse, the IRS scrutinizes it, especially during an audit. Have your tax advisor look over these deductions to ensure they are valid.
4. Make sure your business entity is optimal for tax purposes.
Many small business owners start as a Sole Proprietorship or LLC but then evolve. For example, you may have hired employees or ongoing contractors, and tax laws may have changed. Consult with your tax advisor to find out whether your business entity is optimal for your current operation. Switching your business classification for tax purposes is allowed through March 15 of the current year (your legal entity stays the same). This change remains in effect for five years, so it’s best to consult with your tax advisor first.
5. Have a net operating loss? Use it to get a tax refund.
As a result of COVID-19, the government reinstituted a tax law that was discontinued in 2017. Small businesses can make a Carryback claim, meaning you can apply a current year’s net operating loss to a previous year’s taxes and receive an immediate tax refund. If this scenario applies to your business, use it to accelerate receipt of additional tax refunds.
6. Consider making retirement contributions.
Retirement plan contributions are one of the few payments you can make after year-end and claim as a tax deduction for the tax year.
7. Understand the tax implications of PPP loans.
The Frequently Asked Questions Frequently Asked Questions webpage for the Paycheck Protection Program (PPP), published by the Small Business Association, is a great resource if your business received a PPP loan. Two essential things to know about your PPP loans when it comes to taxes are that:
- Loans under $150,000 are forgiven if the proceeds were timely paid toward eligible expenses, but you must file Form 3508S to receive PPP loan forgiveness.
- There is an unprecedented double benefit attached to properly used PPP funds. First, the PPP cash received is tax free income, so long as the money went toward eligible expenses. Second, even though those eligible expenses were paid with tax free income, they are still tax deductible.
Be sure to verify local tax rules before filing state income tax returns; not all states conform to the federal treatment.
8. Don’t ever file late, even if you can’t pay your taxes.
Fight the human urge to delay filing your return if you don’t have the money to pay your taxes. File your return anyway without payment. You will still owe the tax plus penalties for ‘late payment’, but you will at least avoid penalties assessed for ‘late filing’. Consider entering in an installment payment agreement with the IRS to handle the remainder of the balance due.
Have additional questions about your business taxes? Schedule a meeting with a qualified CPA. You can schedule an appointment with Jeanne at her website, Bolz CPA. For more information about business banking at Elevations, contact your local Business Banking Relationship Manager today.
*Elevations Credit Union can help provide tax resources but does not endorse or warrant any tax professional or provide tax or legal advice. For such guidance, please consult your tax and/or legal advisor.