Operating a business is complete with nuances and complexities that are nearly impossible to keep track of. The tax law is so innately convoluted that it’s no surprise taxpayers find themselves on the wrong side of the IRS when it comes to tax time or a surprise audit. Small business owners are particularly vulnerable to making tax mistakes because they focus more on achieving success than tax minutiae – with potentially grave consequences.
That’s why we decided to write this article, as a kind of quick guide business owners can glance at to make sure they haven’t missed some common tax oversights, especially relevant to the state of Florida.
- Tangible Property Tax
- Tourist Development Tax
- Use Tax
- Not Putting into the Right Retirement Plan
- Not Taking Advantage of All Possible Tax Deductions
1. Tangible Property Tax
It may come as a surprise to you that you owe taxes on the stuff you already own! Tangible property is precisely what it sounds like – things you can physically touch and move from point A to point B. Real estate is an exception, as you (obviously) cannot move it. But those office chairs, computer monitors, and printers are taxable based on their fair market value. Now, we don’t mean you must take inventory of every single possession you own. This tax only applies to items used for your business. Fortunately, your product, if you have one (basically your inventory), doesn’t count as tangible property because you plan on selling it.
Here’s how it works:
Failure to submit form DR-405 by the deadline (at the time of writing, this deadline is April 1st) will result in stiff penalties. There is a $25,000 exclusion, meaning if your property is worth less than that, you won’t owe any taxes on it, though you still need to file a return. And if you are worried that you are way over that threshold, you should know that all property loses value over time through depreciation. So, that $5,000 piece of machinery you bought ten years ago will be worth much less than it was new from a tax perspective.
2. Tourist Development Tax
This tax is particularly important to those renting their property, such as AirBnB owners. Florida law stipulates that any units that are rented out for fewer than six months in the year owe a tax. Also known as a ‘bed tax,’ it is a 6% tax on top of the regular 7% sales tax you must collect as a business owner.
As always, exceptions apply to qualifying individuals and institutions, such as full-time students, full-time military members, churches, or anyone who qualifies for the regular sales tax exemption.
The penalty for late payment is 10% of the tax due for each month or portion of a month.
3. Use Tax
Florida has a 7% sales tax on purchased goods and services, so it makes sense to want to make purchases outside of the state. Clever strategy, right? Well, if you are buying an item from another state to avoid Florida’s sales tax from a state, city, or district without a sales tax – surprise, you owe Florida’s sales tax on that item.
For example, imagine you buy a piece of heavy equipment from New Hampshire, where there is no sales tax. Great! Then you get audited, and the IRS wants to know why you didn’t pay a sales tax on that expensive piece of equipment. Not so great. Keep careful records of your out-of-state purchases, and ensure you have the proper documentation to prove you paid all your taxes, which is excellent advice in any case.
4. Not Putting into a Retirement Plan (or the Proper One)
As a small business owner, you have many options that will improve your ability to save for retirement, keep your tax obligations low, incentivize your workers, and create a more financially secure future for your loved ones and your workers. The correct plan depends on the number of workers your business employs, the financial health of your company, the importance of tax deferrals and tax deductions, and the desire to use contributions later on as loans.
For instance, a Solo 401(k) could be an excellent choice for self-employed freelancers, contractors, or a sole proprietorship. It offers more generous contribution limits compared to a standard 401(k), provides advantageous tax flexibility, and maintains the self-directed benefit characteristic of a typical IRA. If your spouse also earns income through your business, they also can contribute to it. Employing other workers will automatically disqualify you from taking advantage of the Solo 401(K).
Another example would be the SEP IRA, which is great for attracting talent because it is the employer, not the employee, who contributes to the plan. The business owner benefits by claiming the contribution as a tax deduction. They can also increase or decrease the contributions as they wish.
Other retirement plans include:
- The SIMPLE IRA
- Profit Sharing Plans
- 401(K)
Choosing the correct plan is exceedingly difficult yet vital for your retirement and business success, so we highly recommend consulting with a financial and tax professional before deciding which plan to implement.
5. Not Taking Advantage of All Possible Tax Deductions
One thing America is great at is simplifying and incentivizing the creation and administration of small businesses, even if it doesn’t always feel like that. The government accomplishes this by devising a wide range of tax deductions tailored explicitly to improving the success of businesses, large and small. However, knowing what deductions are even available to you is difficult. That’s why meticulous bookkeeping and a CPA are so essential!
Here are some deductions that you should look into:
Qualified Business Income Deduction
Starting in 2018, many owners of sole proprietorships, partnerships, and S corporations may deduct 20 percent of their qualified business income.
Depreciation of Capital Assets
While large equipment purchases often come to mind, smaller items like computers and office furniture can also be depreciated over their useful lives.
Carryover Deductions
If you had business expenses that exceeded your income for the year, you might have a Net Operating Loss (NOL). These can often be carried back to previous tax years for a refund or forward to offset future income.
Bad Debts
If your business has attempted to collect on a debt with no success, you may be able to deduct it.
Start-Up Costs
You can potentially deduct up to $5,000 in business start-up costs in your first year of operation. This could include market research, legal fees, advertising, and other pre-opening expenses.
Hire your Children
Another way of reducing your tax liability is to put the young ones to work legally. This will not only teach them the value of labor but also fiscal responsibility while shifting some of your income from your higher tax bracket to their lower tax bracket. Plus, a child can earn up to $12,500 before paying taxes due to the Standard Deduction. Just be sure to let them enjoy the fruits of their labor!
You can even set them up for future financial success by opening up an IRA or Roth in their name and making contributions. The earlier you start, the more time their investments will have to enjoy compound growth.
Child and Dependent Care Tax Credit
Small business owners who pay for child or dependent care may be eligible for a tax credit of up to 35% of those expenses.
In Conclusion
Is your existing tax plan fully optimized, considering all potential obligations and deductions? If it is, fantastic! However, seeking professional advice could be invaluable if there’s even a hint of uncertainty. Not only could it boost your earnings, but it could also help sidestep uncomfortable interactions with meticulous IRS agents. Don’t hesitate to ensure your financial peace of mind by clicking the button below.
