To most small-business owners, Apr. 15 seems like a long way off. But as the tax-reporting documents arriving in our mailboxes from banks and clients attest, tax season is indeed upon us. Now's the time for entrepreneurs to begin collecting statements, sorting through paper receipts, and making smart decisions about 2005 tax filings, says Keith Hall, a Dallas CPA who acts as the national tax adviser for the National Association for the Self-Employed. Hall recently shared his list of tax-prep tips with Smart Answers columnist Karen E. Klein.
Start early. The corporate-tax deadline of Mar. 15 applies to the many small businesses structured as S-corporations. For partnerships, sole proprietorships, and LLCs who elect to be treated as sole proprietorships for tax purposes, the deadline falls on Apr. 15. Whichever the case, now is not too soon to estimate whether you will owe money or can anticipate a refund. "Start with last year's tax return as your starting point," Hall says. "If you had income or deductions on last year's return, there's a good chance you'll see the same for this year's return."
Get organized. Pull together your W-2s, 1099s, bank interest statements, and investment-account statements. "Hopefully, they're in a paper bag or a shoe box somewhere. But if you don't have the actual receipts, payments will be noted on your bank statements. Most banks print out copies of the checks you've written during the year," Hall says. Some businesses may have accounting software that will note deductions.
Don't forget to count any deductions that aren't in the form of cash disbursements, Hall says. These include mileage deductions for your business vehicles and home-office deductions if you work out of a room in your house.
Research preparation options. Hall believes a substantial number of small-business owners complete their tax returns themselves, some taking the finished forms to a relative who's a CPA for review before filing. But he discourages this practice, noting that most of the errors found by the IRS involve the math mistakes common on pencil-and-eraser returns. "If you prepare your own return, consider online options or tax-preparation software to help ease the number-crunching headaches," he says.
You can also opt to use institutional tax-preparation centers, which reduce most math errors and provide some review of tax issues for small businesses. "These places charge by the form, so a small-business owner filing a Schedule C probably pays $150 or so. The price goes up when the business is more complicated," Hall says.
Find a professional. Hall says the best option for entrepreneurs is to hire a tax professional familiar with small-business issues and able to provide counseling and advice on a regular basis. Get referrals from friends, co-workers, or clients, and expect to pay $250 to $350, depending on the complexities of your return. "There's no substitute for working with someone year after year, in terms of consistency and planning. The things that may cost you the most on your taxes are things that typically aren't included on the forms, like setting up retirement accounts," Hall says.
Stay apprised of tax code changes. This year, the IRS no longer requires you to allocate the sale price of a home between the personal portion and the business portion of your returns if you have a home office and sell your house. That means there's no need to complete a Form 4797 for the sale of business property -- a major record-keeping hassle for home-based business owners. Also, in recognition of the gas price index after Hurricane Katrina, the IRS now allows two standard mileage rates for 2005. Figure 40.5 cents per mile up to Sept. 1, and then 48.5 cents per mile for the balance of the year.
Make a retirement contribution. "Contributions to most retirement accounts such as IRAs and SEPs can be made right up until Apr. 15," Hall notes. "With a SEP plan, you can contribute as much as 20% of your Schedule C earnings to your own retirement and get a full tax deduction." Hall likes SEP plans for small-business owners because they don't require third-party administration and can be set up quickly and easily through most banks or brokerage houses.
"You sign two pieces of paper, give them a check, and you have a retirement plan," he says. If you would like to open a retirement plan but won't have the money by Apr. 15, you can file an extension on your tax return, pay any tax liability by Apr. 15, and then save some money and make your retirement contribution when you file your return by the extension deadline.
Get help when needed: Hall recommends the IRS Web site as the best place to get answers to tax questions. The site includes downloadable publications that deal with the tax code and questions.
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