As tax day approaches, there are many things small business owners should keep in mind when filing this year's taxes.
April 15 is still the annual tax deadline for many small businesses, but unlike individuals, small businesses have different deadlines depending on the type of company they are, the state in which they file their taxes, and other factors. Typically, quarterly estimated tax payments are required throughout the year. Additionally, certain types of small and medium-sized enterprises had until March 15th to submit.
Due to the complexity of filing business taxes, most experts recommend that small business owners work with a professional tax advisor rather than filing on their own or using tax preparation software. I am.
“Taxes don't have to be scary, especially if you have a certified tax professional or trusted advisor,” says Amber Kellogg, vice president of affiliate creation and management at business consultancy Ockham's Advisory. “I always say you shouldn't go to the dentist for an oil change, and you shouldn't do it yourself unless you're a professional.”
But even if small business owners don't file their own taxes, it's important to stay up-to-date on annual tax changes. As the April 15 deadline approaches, here's what small business owners should consider.
Consider expanding
Mitch Gerstein, senior tax advisor at accounting firm Isdanar & Co., said it may be a good idea to file for an extension because several tax bills are pending in Congress this year. You will still pay estimated taxes if you file for an extension, but the final filing deadline is not until September.
This gives tax professionals enough time to file their returns. Furthermore, filing an extension is cheaper than filing an amended tax return, which incurs administrative fees.
One of the reasons Gerstein is recommending this year's extension is that bonus depreciation, which many small businesses employ, is scheduled to decrease in 2023. Bonus depreciation is designed to encourage capital purchases, allowing businesses to take 100% depreciation on certain new and used items. However, from 2023, the proportion of second-hand assets will decrease to 80%, and thereafter it will further decrease by 20% every year. However, if the tax bill pending in Congress becomes law, the depreciation could return to 100%. Gerstein said it's rare for such a significant tax bill to be pending in Congress during his tax season.
Optimize your retirement plan
The SECURE Act 2.0, passed by Congress in late 2022, will give small businesses tax benefits if they offer retirement plans. There are tax credits available to small businesses that start new employee plans. This credit is up to 100% of the start-up costs of implementing and maintaining a new 401(k) plan, up to a limit of $5,000. For the first five years of the plan, there is also a tax credit based on employer contributions, up to $1,000 per employee per year.
Trends in R&D depreciation amount
Scott Orn, chief operating officer at Kruze Consulting, works with venture capital-backed startups. Orne said the biggest concern clients are asking about is Section 174, the part of the tax code that deals with depreciation of research and development costs.
Previously, companies could deduct 100% of their research and development expenses from their taxable income. This was helpful because in many cases the deduction allowed the company to operate at a loss and not have to pay taxes.
However, new legislation meant that from 2022 companies had to “capitalize” their costs or spread them out over several years. This means that U.S.-based R&D costs must be amortized over five years, and overseas R&D costs must be amortized over 15 years.
Orn said large and small businesses alike will be affected by the changes, but it will be small businesses that will be hit the hardest.
“(Small businesses) are businesses that are making profits on things that are safely losing money, and they don't have to pay taxes for a while,” Ohn said. “That's why this is a big surprise to them. It's hurting people and it's like a lot of money that these companies don't have.”
Avoid underpayment penalties
Another reason small business owners turn to tax professionals is the fact that underpayments will cost more this year. In the past, fines for underpayment have hovered around 3%, but this year they more than doubled to 8%. That's because the penalty is based on the federal short-term interest rate plus three points, said Danny Castro, Florida market tax leader for BDO USA, a global accounting network.
“The cost of underpayment has never been higher,” he said.
Skipable 1 credit: ERC
At one time, pandemic-era employee retention credits seemed like a boon for small businesses. This generous credit, designed to help small businesses retain employees during pandemic-era closures, allows businesses to file amended returns and claim the credit.
But that has created a cottage industry of scammers trying to solicit small businesses to help them apply for credit, even if they don't qualify, for a fee. The IRS has launched several efforts to recover some of the funds fraudulently given to businesses. According to the IRS, 500 taxpayers have so far returned $225 million through the Voluntary Disclosure Program, but the program ended on March 22 and small businesses that thought they received the credit in error It was to give them their money back and allow them to keep 20%. Additionally, 1,800 companies withdrew outstanding claims totaling $251 million.
tidy up, tidy up
The best thing a small business can do to get a tax advisor to help them pay their taxes is to stay organized. A shoebox full of receipts won't help you when it comes to filing your taxes in a timely manner. The owner must record the receipt in an orderly database that can be handed over to the advisor. Stay on top of your scheduled quarterly payments.
“[Small business owners]need to be able to keep accurate records throughout the year, and they don't have to go back to April and wonder what that receipt was,” said Amber Kellogg of Occam's Advisory. No,” he said. It's very, very important. ”