Tax season. The one time of year when we can all put our differences aside and join together in despising the same thing. How much do Americans hate paying taxes? Well, according to a Gallup poll, 57% people say they pay too much in federal income taxes. Which is fascinating, because 45% of Americans don’t pay any federal income taxes.
The new tax legislation that goes into effect next year may help ease these pains a bit. After all, the bill is designed to help small businesses compete on a more level playing field against larger corporations. The House and Senate created a small business tax break by providing owners a deduction on the income that “passes through” to their individual tax returns. If you’re a business owner who meets the criteria, you’ll be able to deduct more of your pass-through income on your tax return.
So there’s some good news on the tax front, but that doesn’t mean your taxes are suddenly a cakewalk. You should still approach them as a formidable adversary (or as a complicated friend, if that’s more your style).
The experts from The Hartford say that this kind of careful approach allows you to achieve the double whammy of saving money and simplifying your life. The first way they recommend doing this is to focus on your adjusted gross income. The reason? Because it’s the key to many of your tax breaks, limitations, and additional taxes.
While your adjusted gross income is crucial, the Small Business Association reminds entrepreneurs to not forget about the small stuff. This includes seemingly insignificant things like magazine subscriptions, educational courses, and petty cash purchases. Track these expenses, which inevitably add up over time, then consult with your tax advisor to get the skinny on what you deduct.
Of course, the SBA also points out that you should exercise some restraint. Deductions are a blast, but if you get too deduction-happy, the IRS may come knocking. Any time your expenses are exceptionally high for your business type, or even just substantially higher than the prior year, you could be flagged.
On the topic of IRS penalties, it should be noted that payroll is a particularly easy area for small business owners to make an error. The SBA points to research that shows about 40% of small business end up paying more than $800 each year in IRS penalties.
No matter the specific scenarios of your taxes, it all comes down to record keeping. Carefully manage your records and you’ll score more deductions and simplify your life, while simultaneously decreasing your risk of penalties from the IRS.