As Tax Day approaches, small business owners should be mindful of several important factors when filing their taxes this year.
- Deadlines: While April 15 remains the tax deadline for many small businesses, it’s essential to note that deadlines can vary based on factors such as the type of company and the state where taxes are filed. Quarterly estimated tax payments are typically required throughout the year, and certain types of small businesses had to file by March 15.
- Seek Professional Advice: Given the complexity of business tax filing, experts strongly advise small business owners to work with professional tax advisers rather than attempting to file on their own or relying solely on tax-filing software. A certified tax professional or trusted adviser can provide invaluable guidance and ensure compliance with tax regulations.
- Stay Informed: Even if small business owners delegate tax filing to professionals, it’s crucial to stay informed about any tax changes throughout the year. Remaining aware of tax updates and regulations can help business owners make informed decisions and optimize their tax strategies.
- Consider Extension: With pending tax legislation in Congress, filing for an extension might be a prudent option for small business owners. Filing an extension allows more time for final paperwork to be completed, reducing the risk of errors and costly amendments. Additionally, extensions can be more cost-effective than filing amended returns, particularly if legislative changes affect tax liabilities.
- Optimize Retirement Plans: The Secure Act 2.0, passed by Congress in late 2022, offers tax advantages for small businesses that offer retirement plans to employees. These benefits include tax credits for starting new employee plans and employer contributions, providing incentives for businesses to enhance their retirement offerings.
Changes in tax regulations can significantly impact small businesses, and staying informed about these changes is crucial for business owners and their advisers. Here are some key updates that small businesses should be aware of:
- Section 174 Changes: The tax code section involving research and development (R&D) expenses, previously allowing companies to deduct 100% of R&D costs from taxable income, has undergone revisions. Under new legislation effective from 2022, companies must now capitalize R&D expenses, spreading them out over several years. This change affects both large and small companies, with small businesses particularly impacted as they transition from operating at a loss to turning a profit.
- Underpayment Penalties: Underpayment penalties have increased this year, reaching 8% compared to the previous rate of around 3%. These penalties are calculated based on the federal short-term interest rate plus three points. Small business owners should ensure they accurately estimate and pay their taxes to avoid these higher penalties.
- Employee Retention Credit (ERC): While the ERC initially provided relief to small businesses during pandemic-related shutdowns, there have been instances of misuse and fraudulent claims. The IRS has initiated efforts to recover improperly distributed funds, prompting small businesses to exercise caution when claiming tax credits.
- Organization and Record-Keeping: To facilitate smooth tax filing processes, small business owners should prioritize organization and record-keeping throughout the year. Maintaining accurate records of expenses and receipts in an orderly database can streamline tax preparation and help avoid last-minute scrambling during tax season.
In summary, small business owners should work closely with tax professionals, stay informed about tax law changes, and maintain meticulous records to navigate tax obligations effectively and minimize potential penalties.