While the IRS deadline isn't until April 15, it's essential for entrepreneurs to take steps before Dec. 31 to make sure they get the deductions they deserve. Here's a look at some recommendations from accountants who specialize in advising entrepreneurs and small businesses.
One of the most important moves that any entrepreneur can make is to postpone the acceptance of income until the next calendar year, and to make any necessary large purchases before the end of the current calendar year, says Gary Fox, managing partner of the tax services group at Crowe Horwath LLP in South Bend, Ind. Crowe Horwath is an accounting, consulting and technology firm.
“The advice is the same as it’s been in the past: accelerate deductions and defer income,” Fox says.
One easy way to defer income: if you performed work for a client in late December, simply ask them to send the payment in January, says Josh Bauerle, an accountant and the founder of Willard, Ohio-based CPA on Fire, an online advice platform for entrepreneurs.
Big-ticket items for work should also be purchased in December, if an entrepreneur knows the item will need to be bought soon anyway, says Steven Binder, chief marketing officer at TaxSlayer LLC, an Evans, Ga., company that makes online tax-preparation software.
“Investments, including equipment, furniture, fixtures and even a vehicle, can all be written off as business expense[s],” Binder says.
Some entrepreneurs may also qualify for the Section 179 expense deduction, which accounts for the purchase of business equipment that depreciates in value, Binder says.
While it may seem counterintuitive to make a big purchase for work around the holidays (when you're also spending lots of money for holiday gifts), making big work purchases before Dec. 31 is actually the more conservative approach, Bauerle says.
“Take the tax savings while you can, because the next year is always uncertain, especially for entrepreneurs,” Bauerle says.
The health insurance landscape is filled with land mines when it comes to how entrepreneurs file for taxes. Changes to the reporting requirements for the Affordable Care Act, and related potential penalties, will require special planning and attention, Fox says.
“If there ever was a year to use a specialist, it would seem to be this year,” Fox says. “As it relates to major tax changes, the Affordable Care Act reporting requirements and related penalties will have, by far, the biggest impact on entrepreneurs.”
An expansion of the employer mandate for the Affordable Care Act goes into effect on Jan. 1. Starting that day, any business with at least 50 full-time employees must provide health insurance to at least 95 percent of its workers, and to their dependents, up to age 26, or pay a fee.
While navigating health insurance is difficult, the Affordable Care Act offers a big tax incentive for entrepreneurs, Binder says. Companies with less than 50 employees aren't required to provide health insurance to full-time employees, but if they do, they can qualify for tax credits, he says.
It's important for entrepreneurs to file for all of their qualified deductions, but that’s not enough. It's just as essential to avoid common mistakes that can actually add to your tax bill, according to the U.S. Small Business Administration in Washington.
First up for entrepreneurs: write off the new company that you just created.
“New business owners can write off the expense they incurred before technically opening their doors for business,” Caron Beesley, a contributing author to the SBA's “Managing a Business” blog, wrote in an April blog post.
Many entrepreneurs log significant miles behind the wheel while advancing their business idea. The rules on what constitutes a legitimate deduction for driving are somewhat confusing and entrepreneurs should make sure they're recording the correct deductions, according to the SBA. Commuting from home to work is not a deduction. But driving the same car from your office to see a customer or a vendor is a legitimate tax deduction.
Cars aren't only good for mileage deductions, either. Gas, oil, tires, insurance, parking fees, lease payments, tolls – all these items can be deducted, if they are legitimate business expenses.
Payroll taxes can also come back to bite entrepreneurs, according to Barbara Weltman, another SBA author. When starting a small business, entrepreneurs should take extra time to make certain they are classifying workers into the correct legal category, using an accountable plan for employment reimbursements, maintaining payroll records that an IRS auditor can inspect, and more.
And the bit of advice you'll hear from just about any accountant applies to everyone, not just entrepreneurs: contribute the maximum amount allowed by law to your IRA, 401(k) or other retirement plans.
“Max out your contributions and the IRS lets you take a dollar-for-dollar write-off against your taxable income,” Bauerle says.