The April 15th tax deadline is around the corner and small business owners will be responsible for a significant portion of the country’s annual tax bill. Meanwhile, with all the roles and responsibilities that business owners take on, it can be easy to lose track of new tax laws and opportunities to minimize their tax burden.
But it is never too late to get started – and taking action now can mean savings not only this year, but for years to come. Here are some simple tips and guidelines to help small business owners avoid common tax-time mistakes and maximize returns this year and beyond:
Know before you start: Tax laws are always being updated, and it’s crucial to stay abreast of the latest legislation surrounding eligible tax deductions. IRS.gov offers the latest updates, information and resources to equip small business owners as they prepare for tax time.
Share the wealth through your firm’s 401(k): Small businesses that offer a 401(k) plan may consider making a profit-sharing contribution before April 15th. Employees will appreciate the bonus, and employers will benefit from the tax deduction (as well as the added deposit to their own 401(k) accounts). The amount of the profit share will lower business earnings, resulting in less income to tax, and the money put into the 401(k) is also tax deductible for the company.
If you’re self-employed, maximize your 401(k) contribution: Self-employed business owners may contribute up to $50,000 tax-deferred to their Solo 401(k) plan by April 15th (but they must have their plans started by the end of 2012 in order to make deductions to 2012 taxes).
Open and contribute to an IRA: A speedy way for anyone to reduce their personal taxes for 2012 is to put up to $5,000 (the current maximum) into an Individual Retirement Account (IRA). If you’re 50 years of age or older, you can put up to $6,000 in an IRA.
Nearly half (45 percent) of small business owners had not planned for changes to the tax code by the end of last year, according to the Capital One Small Business Barometer. Taking the above steps can help your firm save on this past year’s taxes; but to ensure maximum benefits in the years ahead, it pays to manage your finances year-round. Here's how:
Start a 401(k): Plan to lessen your tax burden in the years to come. If your business hasn’t started a plan yet, now is great time to start a low-cost plan and take advantage of the higher tax-deferred contribution limits for 2013. (You will likely qualify for $1,500 in government tax credits if your business has less than 100 employees as well!)
Making charitable contributions: Charitable donations shouldn’t be limited to the holiday season. Consider donating money and/or usable items such as equipment, clothing, and other goods throughout the year as a smart way to claim a deduction for the items’ fair market value come tax time each business quarter.
Join business associations or education programs: Those association fees and business-related education expenses are also tax-deductible, and they are a good way to network and enhance your workforce knowledge.
Hire a returning or disabled vet: In November 2011, President Obama signed into law specific tax credits for businesses that hire unemployed veterans. The Returning Heroes and Wounded Warrior Tax Credits provides businesses with maximum credits of $5,600 to $9,600 for every returning soldier hired.
Remember, making educated decisions to save on your annual tax bill is important, but making the most of every dollar spent is also vital for long-term success.
Tony Pica is the senior vice president of small business banking for Capital One, based in Tysons Corner, Va.