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by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director
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Small and medium businesses are the heart of the US economy. Not only do they make up 99.9% of all domestic businesses, but they also keep the American Dream alive. SMB owners most likely start their businesses to pursue their dreams and support their livelihoods, not to get bogged down in accounting- and tax-related tasks. Yet, between January 1st and April 15th, they usually find themselves amidst a whirlwind of tax forms and account books, which can be overwhelming.
However, proper planning and advanced tax preparation can make the lives of small business owners much easier. Moreover, SMBs can leverage tax incentives to their benefit, improving their bottom line.
So, what exactly can SMB owners do?
5 Effective Tax Tips for Small and Medium Business Owners
Separation of Business and Personal Expenses
This may seem like a no-brainer, but it is a fairly common mistake, especially for small business owners who often pay for business expenses from personal funds and vice versa. This results in losing track of transactions, audit trails, and deductions. Commingling funds makes accounting more complex and costly and may raise red flags during an audit. In other words – it is an absolute nightmare for their CPA!
The easy solution is to keep separate business and personal accounts, credit cards, and lines of credit. This will ensure that business expenses can be easily tracked and recognized, making it easier to keep track of receipts, pay bills, and manage cash flow. By separating personal from business finances, small business owners will have better clarity regarding their financial position and have a comprehensive understanding of their business operations.
Leverage Tax Credits and Incentives
Realizing small and medium businesses’ impact on the economy, the government has rolled out many tax credits and incentives over the years. Unfortunately, very few small business owners take advantage of these credits and claim them.
Here are a few tax credits that small and medium enterprises can claim –
- Research and Development (R&D) Tax Credit
The R&D tax credit was introduced to promote technical jobs and innovation investments in America and is one of the best ways for businesses to significantly reduce their tax liability. It can be claimed by businesses across industries, irrespective of size, not just major corporations with research labs. Businesses involved in development, design, or improvement of products, processes, formulas, or software also qualify for this tax credit. Moreover, it can be claimed at both the federal and state levels, with over 30 state credits available.
- Employee Retention Credit (ERC)
The ERC is a refundable tax credit available to small and medium businesses and non-profit organizations that experienced revenue decline or business disruptions as a result of government mandates implemented to combat the pandemic. By providing financial support, the ERC assists SMBs in navigating the economic impact of the crisis and continuing their operations.
- Work Opportunity Tax Credit (WOTC)
The WOTC is a federal tax incentive designed to encourage small and medium enterprises to hire individuals from certain target groups who have traditionally faced barriers to employment. To qualify for the WOTC, employers must hire individuals from one of the designated target groups, which include veterans, individuals receiving public assistance, ex-felons, and others. The WOTC can provide up to $9,600 in tax credits for each qualified employee hired by a small business.
Being aware of such tax credits and making claims at the right time can benefit small business owners as these refunds are bound to improve their bottom lines.
The Art of Bookkeeping
‘Bookkeeping’ means keeping track of all business transactions, such as cash payment receipts, credit card transactions, loan proceeds, and repayments. It’s a methodical but tedious task that small business owners often delegate to CPAs. Nevertheless, bookkeeping is a vital aspect of running a successful small business.
Up-to-date books can give real-time insight into businesses’ key performance indicators and profitability. Disorganized books, on the other hand, can result in costly mistakes and missed opportunities in claiming tax credits and incentives.
Here are a few things small business owners should practice regarding bookkeeping:
- Don’t get lazy about expense tracking – save every receipt!
- Record all business transactions accurately on an ongoing basis – not all at once during tax filing season.
- Hire a credible CPA for professional help.
Timely Payment of Quarterly Estimated Tax
Small and medium business owners have a lot to consider when it comes to their tax payments. Based on the business structure, the IRS often requires quarterly estimated tax payments rather than one huge chunk at the end of the year.
Small business owners should consult their CPAs to understand whether they need to make these quarterly payments. They can also refer to the previous year’s tax return as a way to estimate quarterly taxes as accurately as possible and avoid penalties.
If a small business owner overpays, they will receive a refund. At the same time, not making these payments on time or underpaying can result in penalties – notwithstanding if the business is due any refund when they file tax returns at the end of the year.
Find the Right Tax Consultants
Small and medium enterprises rely heavily on their CPAs for accounting, bookkeeping, and other tax-related services. However, CPAs often don’t have the bandwidth to guide business owners on complex, and often the most valuable, tax credits and incentives. This can be a considerable loss because many credits offer a dollar-to-dollar reduction of tax liability and potentially put the business in a lower tax bracket. Tax consultants play a major role in making the most of these incentives offered to small business owners.
The right tax consultant can help SMB owners become aware of the various tax credits and incentives available to them and also help them make the right claims to maximize their returns.
The aG Advantage
At alliantgroup, our tax experts have an extensive understanding of and experience in navigating numerous federal and state tax credits and incentives. Their knowledge and insights have helped us serve 27,000 clients and partner with 4,500 CPA firms.
Get in touch with us to take advantage of tax credits and incentives available for your business.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
