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Guest Post: 3 Strategies That Can Save You Money During Tax Season–if You Get Started Right Now

A little bit of foresight will make for a smoother April.

By Jeanine Skowronski, Senior editor, Policygenius Magazine
Twitter: @JeanineSko

Will Hankinson, the Atlanta-based owner of video rendering service IntroCave, could have banked more of his business’s 2018 profits had he paid closer attention to a big change that went into effect as a result of the Tax Cuts and Jobs Act of 2017.

“Last year, my thinking was that my regular job already deducts taxes and I should try to zero out the small-business income,” says Hankinson, who also brings in W-2 earnings as the technology lead at marketing agency Dagger. To do so, he put all of IntroCave’s profits — nearly $9,300 — into a solo 401(k) in lieu of contributing to his workplace retirement plan. As a result, Hankinson couldn’t capitalize on the qualified business income (QBI) deduction, which lets eligible pass-through businesses (sole proprietorships, partnerships, S corporations, and most trusts and estates) deduct up to 20 percent of their revenue. “My marginal tax rate was 24 percent last year, so I could’ve saved about $450,” he says.

The Tax Cuts and Jobs Act may have provided a boon to small businesses — besides creating that pass-through deduction, it cut the corporate tax rate from 35 to 21 percent — but it also led to a chaotic 2019 tax season as owners and tax pros rushed to familiarize themselves with the new code. “The upcoming tax season will be less complicated,” says Chester Spatt, a tax expert and professor of finance at Carnegie Mellon’s Tepper School of Business. Small businesses can have an even easier time by taking these steps as 2019 turns into 2020.

Jeanine Skowronski, Senior editor, Policygenius Magazine

1. Update your books.

Aim to finalize year-end profits as soon as you can after December 31, advises Kelly Crane, certified public accountant and president of Napa Valley Wealth Management. Then you’ll have an idea of how much you’ll owe in April, and if the number is high, you can make a final estimated tax payment by January 15 for the fourth quarter of 2019.

You will also be able to make better-informed decisions about how to reduce your tax liability in late 2019 and early 2020, according to Michael Sacco, a CPA and owner of Sacco & Associates, a consulting firm in Worcester, Massachusetts. Measures might include making retirement contributions, buying more equipment, and spending down profits.

2. Document and categorize expenses.

Brandon Amoroso, CEO of ElectrIQ Marketing in Los Angeles, wasn’t clear on what he could expense on his 2018 tax returns, so in his company’s first year of business, he didn’t keep all of the applicable receipts — most notably for his travel to and from client meetings. As a consequence, says Amoroso, “we probably left about $2,000 on the table.” To maximize deductions, ElectrIQ switched from Excel to QuickBooks, which sorts expenses automatically. “We invested a bit of money into smoothing that process out to save a ton of time,” he adds.

Organizing your invoices, receipts, and records by type of expense can also save you money. “Some things are 100 percent deductible, some things are not,” says LeTonya Moore, a Harvest, Alabama-based business attorney who works with online legal company Rocket Lawyer. “Don’t show up to your CPA’s office or tax lawyer’s office with a box of loose receipts.”

3. Hire the right tax professional.

The new tax code was designed to benefit small businesses, but it’s complex. The QBI deduction, for instance, can vary by trade or industry. So small-business owners should consider hiring a professional who is not only familiar with the new laws but also well-versed in their industry. “That ensures you are getting the deductions you are due,” says Moore.

Elise DeCamp, founder of Ocelot Market, a Brooklyn-based seller of ethically sourced, artisan-made fashion, had to file for a tax extension in 2018, largely because of confusion over how to reconcile unsold inventory in monthly profit-and-loss statements. So this year she hired a CPA specializing in e-commerce businesses. DeCamp expects to close her books in the first few weeks of January and to file her 2019 returns by April 15. Her advice: “Get a quality team to advise you on the tax season.”

Jeanine Skowronski is a veteran personal finance journalist and the editorial director of Policygenius, a New York City insurance tech startup.

Syndicated from the Winter 2019/2020 issue of INC. MAGAZINE