This tax season, small businesses across Colorado are looking for ways to lower their taxes. That’s why we reached out to Jeanne Bolz, who heads Bolz’s CPA in Fort Collins and has been helping business owners with their taxes for over 25 years. This member of Elevations Business Banking also volunteers for the Larimer County Small Business Development Center and advises new small business owners. We asked Jeanne for tips * that could help small businesses cut their taxes, and here’s what she said:
1. Keep your business accounts separate from personal accounts.
Always keep a special checking account, debit card and credit card just for your company. Even the most organized business owners risk losing a receipt or overlooking deductible expenses when using their personal bank accounts and credit cards.
2. Know what is deductible for your business.
Contrary to popular belief, there is no single master list of business deductible expenses. What is deductible for one company may not be deductible for another company. The IRS uses the “normal and necessary” standard to make this determination:
- Is it ordinary for your type of business to purchase this item?
- Is that an article necessary so that your company generates income?
To illustrate this standard, let’s look at the work of a hair and makeup artist. Buying hair products and makeup is a normal part of their business and necessary to generate income. For an ice cream shop owner, the use of hair and makeup items may be part of their personal grooming at work, but they are neither normal nor necessary for the ice cream shop.
3. Be careful about subtracting mixed-use expenses like a car and a home office.
Mixed-use items are those that you use for personal and professional purposes and they run the risk of overly liberal deductions. Since this category can potentially be misused, it is examined by the IRS in particular during an audit. Have your tax advisor review these deductions to make sure they are valid.
4th Make sure your business unit is tax optimal.
Many small business owners start out as sole proprietorships or LLCs, but then move on. For example, you may have hired employees or current contractors, and tax laws may have changed. Contact your tax advisor to find out if your business unit is optimal for your current operation. You can change your company classification for tax purposes until March 15th of the current year (your legal entity remains unchanged). This change will remain in effect for five years. It is therefore best to contact your tax advisor first.
5. Do you have a net operating loss? Use it to get a tax refund.
As a result of COVID-19, the government reintroduced a tax law that was suspended in 2017. Small businesses can make a carryback claim. This means you can apply a current year’s net operating loss to a previous year’s taxes and get an instant tax refund. If this scenario applies to your business, it can help you get additional tax refunds faster.
6th Consider making pension contributions.
Pension plan contributions are one of the few payments you can make after the end of the year and claim as a tax deduction for the tax year.
7th Understand the tax implications of PPP loans.
The Paycheck Protection Program (PPP) Frequently Asked Questions website published by the Small Business Association is an excellent resource if your business has received a PPP loan. Two Important Things You Should Know About Your PPP Loans When It Comes To Taxes Are:
- Loans less than $ 150,000 will be granted if the proceeds are paid on time for eligible expenses. However, you must submit Form 3508S to receive PPP loan forgiveness.
- There is an unprecedented double benefit associated with properly used PPP funds. First, the PPP cash received is tax-free income as long as the money is used for eligible expenses. Second, these eligible expenses, although paid with tax-free income, are tax deductible.
Make sure you check local tax laws before filing any state income tax returns. Not all federal states comply with federal treatment.
8th. Never register late even if you cannot pay your taxes.
Fight the human urge to delay filing your return when you don’t have the money to pay your taxes. You can still submit your return without payment. You still owe the tax plus “late payment” penalties, but at least you avoid “late filing” penalties. Consider entering into an installment payment arrangement with the IRS to handle the remainder of the balance due.
Do you have any further questions about your business taxes? Schedule a meeting with a qualified CPA. You can make an appointment with Jeanne on her website, Bolz CPA. For more information on business banking at Elevations, contact your local Business Banking Relationship Manager today.
* Elevations Credit Union may assist in the provision of tax resources, but does not endorse or justify tax professionals or provide tax or legal advice. For such guidance, please contact your tax and / or legal advisor.
Other resources for small business in Colorado: