Last-Minute Tax Tips for Small Business – How to Deduct and File Correctly (and Keep the Tax Man From Your Door)

Because of a quirk with a local holiday in the District of Columbia, April 17^th is the deadline to file your 2011 small business taxes this year. Whether you use the services of an accountant or file your own taxes, there are still some things you can do to ensure you file properly, avoid audits, and claim the right tax deductions.

Keep Good Records

You probably hear this from tax advisors and accountants all year long, but proper record-keeping year-round is the first step to ensuring your taxes are filed accurately and that you have the paperwork you need to back-up your deduction claims should you be audited.

Use an accounting program or software that can help you centralize and track everything so that come tax season your records are organized and expenses are easy to deduct. This guide to managing your tax obligations from SBA offers lots of advice on the basics of bookkeeping and how to set up bookkeeping software.

Understand Your Deductions

What small business deductions can you take? Do you have the documentation and original receipts to back them up? Tax credits and deductions change each year. Both your CPA and your tax software can guide you through these deductions by asking you probing questions. These blogs also offer tips on common small business tax deductions and some deductions and credits that are specific to the 2011 tax year:

• Startup Cost Tax Deductions – How to Write Off the Expense of Starting Your Business
• Learn How to Claim the Home Office Tax Deduction for Your Home-Based Business
• Going on the Road? How to Deduct Your Small Business Travel Expenses
• Tax Strategies for a Mobile Office – Includes information about deducting technology costs.
• 7 Money-Saving Year-End Tax Tips for Small Business – Identifies tax credits and other deductions specific to the 2011 tax year, including the increase in the deduction limit of the Section 179 deduction, which allows businesses to deduct expenses for a variety of capital equipment purchases including computers, furniture, certain business software, vehicles, manufacturing equipment, and more.

For a comprehensive guide to current year tax deductions check out SBA’s guide to small business expenses and tax deductions. 

Doing Your Own Taxes?

Many businesses use a CPA, but if you are a sole proprietor, home-based business or a freelancer, then tax preparation software may be an option. Be aware that not all solutions (particularly the free ones) accommodate business tax filers (who need to file Schedule C).  Before you sign up for any service, make sure it supports the common business forms. Turbo Tax, H&R Block, and TaxAct all offer tax filing tools for small business. This blog explains other factors to consider before you buy one: 3 Tips to Make Selecting Tax Software Not Taxing.

Common Audit Traps to Avoid

Don’t just cross your fingers and hope for the best. Be aware of potential red flags and act on them before the IRS does:

1. Classifying Employees as Independent Contractors – Independent contractors and employees are not the same, and it's important to understand the difference. In the eyes of the IRS, misclassification can be seen as an attempt to avoid payroll taxes, and non-compliance can bring penalties and back taxes. These guides and blogs help shed light on the distinction and how to ensure you are classifying your workers correctly:

• Independent Contractors vs. Employees – This guide from SBA explains the difference, why it matters, and the impact on your taxes.
• Misclassifying Workers as Independent Contractors Can Be Costly
• Are You Classifying Independent Contractors Correctly? IRS Offers Businesses an Amnesty

2. Home Office Deduction – This deduction is very specific and not all home-based businesses will qualify. Likewise, if you run your business from a commercial location and claim the home office deduction, you might trigger some interest from the IRS. This blog explains how it works, how to determine if you are eligible to claim it, and what specific expenses you can write off.

3. Large Sum Miscellaneous Deductions – If you claim a large amount of itemized deductions relative to your income, the IRS will get suspicious. Likewise, if you bucket a large amount of miscellaneous expenses, you may raise eyebrows. Be specific and label every deduction (this is where good record keeping comes into play).

4. Keep Business and Personal Expenses Separate – The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle for personal use. Be diligent about keeping good records. Maintain a separate bank and credit card account for your business.

Additional Resources

• SBA Small Business Tax Guide
• Tax Essentials for Small Business Owners – This SBA live chat transcript includes year-end tax tips from with Edward S. Karl, Vice President of Taxation, American Institute of Certified Public Accountants (AICPA).
• How to Choose the Right Tax Year for Your Small Business

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley