If you own your own small business, recent tax changes may require you to revisit dated strategies to make sure you're staying smart and savvy. With this in mind, Meisa Bonelli, senior tax professional of Millennial Tax offers the following tax planning tips business owners should heed.
Reconsider Your Business Entity.
Small business owners that operate under an LLC or S-corp entity have typically chosen those entities to operate their businesses under because of the past tax rates on pass through income was taxed at a lower rate and they could avoid double taxation with a C-corp.
However, now that the corporate tax rate has been lowered to 21 percent down from 35 percent, solopreneurs, freelancers and micro-small business owners may want to review and reconsider if a pass-through entity is serving their short and long-term business objectives. For instance, if a business now sees the opportunity to raise capital from foreign investors and was previously operating as an S-corp, now is the time to meet with their attorney and tax professional to see if a C-corp or other entity would be more of an ideal fit for their objectives.
For business owners that want to maximize the new pass-through deduction, substantiating their expenses will play a crucial role in their record keeping. Substantiating expenses include: writing who a small business owner dined with for business meal expenses, digitizing receipts so that they remain legible if ever requested by a tax authority, and not relying solely on bank and credit card statements as proof of business expenses. It's not the IRS' job to figure out what's on your tax return. Chances are, if a tax authority is taking the time to do so, it's more than likely to exclude deductions and factor more of your claimed expenses into income, not the other way around. Make it easy on them by doing the work ahead of time and they'll make it easy on you by allowing you to have your substantiated deductions.
Get Serious and Get Organized.
For small businesses that may have been laxed in the past with their record keeping, if they're operating under a pass-through LLC or S-corp, they need to get serious about keeping business and personal expenses separate. The tried-and-true receipt organizer coupled with a spreadsheet and detailed notes is recommended for the small business owner that doesn't want to spend on bookkeeping software, but who is diligent enough to sit down and reconcile their expenses. Obviously, an accounting or bookkeeping software makes things simpler and readily accessible as most have mobile apps. But small business owners need to understand that no software works if they're not going to do the bookkeeping work. If a small business owner equates getting their teeth pulled at the dentist with doing the company's books, it's high time to hire a tax professional.
If trying to figure out the 20 percent pass-through deduction versus the 50 percent computation (if W2 wages are applicable) or digitizing receipts, and creating lofty spreadsheets sounds like a headache, small business owners should hire a trusted tax professional. Since the game has changed, the savviest small business owners will play offense by planning with a competent tax professional, rather than using reactive tax strategies of the past. Preparedness is what will ultimately fuel profitability for solopreneurs, freelancers and micro-small businesses in this new tax era of tax change.
Before making changes, meet with a tax specialist or financial advisor.
Source: Millennial Tax
Published with permission from RISMedia.