Maximize your tax return: Essential tips for small business owners this tax season

By Kathryn J. Clark

As a small business owner, you want to get the most out of your business income tax return. Your business return is critical for understanding your business’s financial health and planning its future.

It is imperative for business owners to provide their accountant with all the necessary documents and to review and understand their tax returns. Below are areas of emphasis to pay particular attention to ensure a smooth filing process this upcoming tax season.

Day-to-day operations impacting your tax return

First, make sure you have a complete year-end trial balance. An accurate trial balance, listing all account balances in your company’s general ledger, is the foundation of your business’s transactions during the fiscal year.

• Reconciliation: Specific accounts, such as cash, credit cards, and note payables, must be reconciled. Additionally, provide bank, loan statements, and credit card statements to support the reconciliations. Also, include any invoices for capital expenditures over $3,000.
• Retained earnings:  You should also reconcile your retained earnings at the end of the year.  Common errors caught in the reconciliation process include prior period adjustments not properly reflected, missing transactions, and data entry mistakes. Review any adjustments to prior period financial statements to ensure they are correct in the current retained earnings balance.
• Cash flow: As a business owner, you should understand your company’s cash flow – what it is, how it works, and how to analyze it. This includes expense tracking, cash flow management, payroll decisions, and capital expenditures.
• Track deductions: Maximize your deductions by keeping consistent and accurate records of expenses throughout the year. Plan and save for quarterly estimated tax payments to avoid nonpayment penalties.
• Plan salaries and bonuses: Be strategic with how officer/owner and employees’ wages and bonuses are issued and leverage retirement accounts. Salaries and bonuses affect payroll taxes, deductible expenses, and retirement contributions.
• Retirement accounts: Contributions to retirement account plans such as SEP IRAs and 401(k) reduce taxable income and build wealth for the future.
• Depreciation and large expenses: The timing of capital expenditure, funds used to purchase long-term assets such as buildings, vehicles, equipment, and software, can impact taxes through depreciation.

Key sections to review

It’s important to understand when and how revenue is recognized and how it affects taxable income. Under the accrual accounting method, ensure accounts receivable are collected promptly to convert reporting revenue into actual cash flow.

• Profit and Loss (Schedule C or Schedule K-1): This reports the business’s net income and summarizes income and expenses. The business’s net income determines your taxable income and how much you can pay yourself. The net income reported on the tax return should match the business’s internal financial statements.

• Balance sheet: Partnership and S corporation tax returns include a balance sheet, which reports the business’s assets, liabilities, and equity. Variances can be favorable, indicating a positive change, such as a decrease in accounts payable, or unfavorable, such as an increase in accounts receivable, inventory, or debt levels, which can indicate a cash flow strain.

• Salary v. Owners’ distribution: As the owner, it’s up to you how much you take from profits or capital contributions to pay yourself. Remember, these distributions are not tax deductible to your company. If you are a sole proprietor or partner, you may be able to structure your business as an S corporation to pay yourself a reasonable salary and avoid having to pay self-employment taxes.

 SALT

The State and Local Tax (SALT) permits taxpayers to itemize up to $10,000 of property, sales, or income taxes paid to state and local governments. Among the options lawmakers may consider are:

• Extending a modified cap on SALT deductions for individuals
• Closing SALT workarounds for pass-through businesses
• Modifying SALT deductions for C corporations.

The Boyer & Ritter team will update you on any developments about SALT and other tax changes.

Additional credits and deductions

As you ready your return and discuss it with your preparer, make sure you take advantage of all available credits and deductions. Here are some to consider:

Credits include:

• Research and Development (R&D) Tax Credit: The credit offers a tax liability reduction opportunity to businesses of all sizes for expenses associated with innovating a process or product and qualifying research activities, including software development, architectural design, product enhancements, and more.
• Work Opportunity Tax Credit (WOTC): Extended until December 31, 2025, employers can claim the credit if they hire individuals facing barriers to employment. Businesses can get a credit of up to $2,400 for every new full-time hire based on the wages paid in the worker’s first year. The employee must work at least 400 hours and meet all the specifications.
• Energy Tax Credits: Under the Energy Efficient Commercial Building Deduction (Section 179D), businesses can deduct expenses incurred for energy-efficient building upgrades,  including improvements to lighting, heating, cooling, ventilation, and hot water systems.
• Business Energy Investment Tax Credit (ITC): Businesses can get a tax credit of up to 30 percent if they install renewable energy systems such as solar panels, wind turbines, fuel cells, and geothermal systems. The credit is currently available through 2032 and is subject to change.
• Renewable Electricity Production Tax Credit (PTC): Businesses that produce electricity from renewable sources like wind, biomass, geothermal, and hydropower can claim a 30 percent credit on the cost of installing the systems through 2032.
• New Energy Efficient Home Credit: –– Eligible contractors making energy-saving improvements on properties can claim up to $5,000 for homes acquired in 2023-2032 and up to $2,000 for homes acquired before 2023. Additionally, new home builders can qualify for credits.

• If you use your home partly for business, the credit for eligible clean energy expenses is as follows:
  • Business use up to 20 percent: full credit.
  • Business use more than 20 percent: credit based on share of expenses allocable to nonbusiness use.

• Alternative Fuel Vehicle Refueling Property Credit: Companies that install alternative fuel vehicle refueling and charging stations in low-income communities or non-urban census tracts can claim a credit valued at 6 percent of the equipment cost, capped at $100,000 for each piece of equipment.

Deductions include:

• Energy-efficient commercial buildings deduction: Building owners who increase the energy efficiency of certain building systems by at least 25 percent may qualify for this deduction.

• Home office deduction: Small business owners who regularly and exclusively use part of their home for work and business-related activities may be able to write off rent, utilities, real estate taxes, repairs, maintenance, and other related expenses. You can claim the deduction on Schedule C.

• Standard mileage rates: In addition to business use, companies can deduct mileage from vehicle use related to charitable, medical, or moving purposes. For 2024, the IRS standard mileage rates are $0.67 per mile for business, $0.21 per mile for medical or moving, and $0.14 per mile for charity.

• Business interest deduction: Certain types of businesses may be able to deduct the interest on loans used to maintain operations or pay for expenses as an ordinary business expense.

Bottom line

Make things easier for yourself by keeping an updated file of forms and documents throughout the year to avoid a last-minute scramble during tax time.

Your CPA or tax advisor is more than a preparer – they act as a strategic partner, helping you understand the story your tax return talks about your business. The Boyer & Ritter team is ready to help answer your tax questions and help you take full advantage of deductions, write-offs, and credits that may apply to your business.

Kathryn Clark is a Manager with Boyer & Ritter. Kathryn’s emphasis is in tax and small business, providing tax and accounting services for businesses and individuals. Contact Kathryn at 717-761-7210 or kclark@cpabr.com.