ROCHESTER, N.Y. (WROC) — CPA Dave Young of the New York State Society of CPAs offered up some tax advice for small business owners Monday during News 8 at Sunrise.
The advice comes just days ahead of this year’s Small Business Saturday on November 30.
Young said tax reform has created a scenario where small business owners should consider restructuring. The reform created a new 20 percent tax deduction for owners of certain pass-through businesses. A pass-through business is one in which profits from the business flow to their owners to be taxed under individual income tax rates. Sole proprietors, partners in a partnership, members in an LLC or LLP, or owners of S corporations may qualify for this valuable tax break. However, to maximize the deduction, the new law may require the owner to change the tax structure of their business. For example, some sole proprietors may need to become an S corporation to maximize their tax savings under the new law.
In addition to this important new change, Young offered advice that every small business owner should be taking advantage of when it comes to making the most of your tax deductions. They include:
Get the most out of your auto/ gas deduction. The government lets you deduct business-related car expenses, which you can calculate using two different methods. Try both of them and see which one gives you a larger deduction:
Standard Method: in 2019 it is 58 cents per business mile plus tolls and parking.
Actual Method: add up all actual automobile expenses – including gas, repairs, oil change, car insurance, car washes, etc. – and then multiply it by your business percentage (business miles/total miles for the year).
Note: Your commute from home to work is not deductible. But once you get to your office, traveling to a client counts as deductible business miles. Traveling back from the client to your office is deductible, but then from your office to home is “commuting” and is not deductible.
Get the most out of your home office deduction. If you use a home office consider using the simplified deduction method: $5 per square foot of area used exclusively for business (300 square feet maximum). The standard method requires you to keep track of utilities, maintenance, mortgage interest or rent and deduct the business percentage (total square footage of home divided by the square footage of the office) on your Schedule C, which you may not have readily available.
Hire your children. Hiring your children is one of the easiest ways to reduce self-employment income while at the same time helping your children prepare for their own future. If your child earns $12,200 or less, their Federal tax rate will be 0%, so up to $6,000 can go into a Roth account for 2019. This money can later be used to pay for college or a first home. Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to the Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child is subject to income tax withholding, regardless of age.
Take advantage of the Section 179 deduction. The Section 179 Deduction is now $1,000,000 for 2019. This means businesses can deduct the full cost of equipment from their 2019 taxes, up to $1,000,000, with a “total equipment purchased for the year” threshold of $2,500,000, subject to certain limitations.
Keep good records about who is an “employee” and who is an “independent contractor.”
Organize your tax records to make sure you know where you stand right now.
Make sure you keep your personal expenses and business expenses separate.
Keep track of places where you may have a “physical presence” (even unknowingly), to properly comply with state rules governing sales tax collection.
If it becomes necessary for your small business to open a foreign bank account in order to pay vendors or others in another country, make sure that you (and your tax accountant) are vigilant in following the new rules on foreign bank accounts enacted in the Foreign Account Tax Compliance Act, or FATCA.
Make sure you’ve paid in for safe-harbor – 110% of the prior year tax or 90% of this year’s tax is due.
For more “Smart Money” advice, visit the New York State Society of CPAs website.