Today, Bend is a small business hub, hailed as one of the most eclectic and fastest growing cities for entrepreneurship in America. Bend's Economic Development Department counts 6,500 businesses in the city and director Carolyn Eagan is building a vision for the future with great occupational diversity. The wheels are turning and Sen. Ron Wyden on a recent visit to Bend commented that the city is poised to be the next tech mecca. Roger Lee, executive director at Economic Development for Central Oregon (EDCO), recognizes exceptional potential for small businesses in Bend's top-performing "brew/bio/rec/tech" industries. That is, microbreweries, bio-science, recreation, and high tech businesses are expected to continue to flourish in Central Oregon. With so much buzz around Bend, the spirit of rugged individualism lives on, and, by way of counterpoint, so does the Internal Revenue Service (IRS).
Tax return file date: March 15 for corporations; April 18 for sole-proprietors and partners
"Small business" is a relative term, but the Small Business and Self-Employed Tax Center is an IRS resource for taxpayers who file Form 1040, and who have assets of less than $10 million. Small businesses come in many varieties, from the sole proprietorship to the partnership to the corporation and the S-corporation. For sole proprietors and partnerships (partners file Form 1065), the return filing deadline this year is April 18. For corporations and S corporations, the tax filing deadline is March 15.
Small business owners who use a sole proprietorship can report business income and expenses on a Schedule C attachment to a personal income tax return. Corporations, on the other hand, use Form 1120, which is a separate corporate tax return with the earlier March 15 deadline. For those who are not sure which file date applies, this is a great reason to speak to a tax expert, or go directly to the IRS resources available online at IRS.gov.
Large or little, many small business owners share the dread of an audit after filing, and opt not to face the thousands of pages of the U.S. tax code alone. Count this as reason number one to hire a tax professional. With the help of two certified public accountants (CPAs), each with more than 30 years experience, a few of the most important publications for small businesses are explored below.
Calculating Mileage, Auto Use and Depreciation: Publication 463
Deducting an excessive percentage of business use for a passenger car, "would be considered low-hanging fruit for the IRS," says tax expert Paul Bardaro, CPA. The IRS uses aggregate stats from the North American Industry Classification System (NAICS) to identify drastic outliers. However, those who are entitled to the deduction legitimately should not be afraid to take it, he says.
Overstated adjustments, deductions, exemptions, and credits account for more than $30 billion in unpaid taxes annually, according to the IRS. As a result, taxpayers should be very familiar with tax law before deducting car and truck-related business expenses. One good place to start is the IRS's comprehensive Publication 463: "Travel, Entertainment, Gift and Car Expenses." It's a 56-page document, so here are a few highlights pertaining to mileage and depreciation:
The 2015 optional standard mileage rates for the use of a car, van, pickup or panel truck:
57.5 cents per mile for business miles driven (up from 56 cents in 2014)
23 cents per mile driven for medical or moving purposes (down half a cent from 2014)
14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study conducted by an independent contractor for the IRS. It includes the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law. Taxpayers do have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
When calculating auto depreciation, it's best to keep in mind that there is a maximum depreciation limit per year, depending on what year the vehicle was first placed into service. Taxpayers who claim accelerated depreciation may not use the business standard mileage rate for a vehicle, and the standard rate is not available to fleet owners (more than four vehicles used simultaneously).
Home Office Deduction:
Like auto deductions, small businesses operating out of the home can deduct a percentage of expenses for business purposes, explains CPA Gail Rosen. This is computed either with the actual or the simplified method. "Essentially, the simplified method is an alternative to tracking and substantiating your expenses," Rosen says. "It is computed by multiplying the allowable square footage of your office space by $5, up to 300 square feet. If you use this method, the maximum deduction is $1,500, and no depreciation, utilities or other home office expenses can be claimed," says Rosen in her newsletter.
The 2015 IRS publication 8829 covers expenses for business use of a home, going into great detail about which expenses are deductible in full, which are deductible based on the percentage of the home used for the business, and which expenses are not deductible. Claiming the use of a home for business through a home office deduction can have tax ramifications down the road when the home is sold, Bardaro notes.
Small Business Health Care Tax Credit: Publication 8941
The Small Business Health Care Credit is another challenge facing entrepreneurs come tax time, and is considered by some CPAs to be too complicated for non-tax professionals to navigate. However, failing to even consider it is perhaps the biggest mistake of all, says Bardaro.
For small businesses with fewer than 25 employees, where employees earn on average less than $50,000, this tax credit pertains to employer-paid health care insurance premiums. For small businesses that qualify, for-profit employers can use the form to get up to 50 percent of the contribution to employee premiums. Nonprofit employers can get up to 35 percent. Form 8941 is used to calculate the credit.
Other than the health care tax credit, other tax credits to investigate include the Work Opportunity Credit (IRS Form 5884), applicable for businesses who hire from special target groups, such as veterans. The Domestic Production Activity Deduction (IRS Form 8903), is also worth examining by those companies involved in manufacturing, production, and construction activities.
Form 1099-MISC, Miscellaneous Income
Form 1099-MISC is something that comes up every January for small businesses, and the rules are often adjusted yearly. The IRS has tightened its 1099 requirements, and the most fundamental thing to know is that a 1099 must be issued by the small business to anyone it paid more than $600 to by cash or check for rents or services (including parts and materials). This also applies to prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish and a few other categories, such as attorney fees. However, if the service provider is either a C corporation or an S-corporation, it is not necessary to issue a 1099 (except for attorneys, then it is required). Keeping good books and noting the type of payment when it is made make these calculations a lot more tolerable as only payments made by cash or check require issuing a 1099. For more information and instructions about 1099-MISC, visit IRS.gov online.
If this year didn't go as well as planned, the time to start planning for next year's tax season is now. Working with a CPA throughout the year can have a significant impact on a small business's tax consequences.