10 Basic Tax Details Accountants Wish Your Business Knew
This article covers 10 common tax questions business owners ask their accountants and explains how each affects tax filings. When clients are educated, tax season may be less confusing for business owners, which may help accountants finish paperwork more quickly.
Does my business get tax credit for charitable donations?
Before making charitable contributions, small businesses should consider how the contributions and charities align with their values and goals. Businesses should also make sure the charity is an eligible charity by checking the IRS's Section 501(c)(3) search tool.
Contributions of cash and inventory are deductible, as are event sponsorships. The value of services—time provided to a charity—is not deductible, although expenses incurred in providing the services are deductible.
The law has very strict documentation requirements, and businesses should always receive a receipt for charitable donations at the time of the contribution. Deductions for a regular C corporation are limited to 10 percent of taxable income, with any excess carrying over for five years. Deductions for S corporations or partnerships are passed through to the owners on their K-1 forms. Generally, the individual limitation on the deduction for any year is 50 percent of adjusted gross income.
Will a health-incentive program decrease my taxes?
Wellness incentives are deductible by a business. The larger issue is whether they are taxable to employees. Incentives are taxable to employees unless they are employer-provided health benefits or are considered a de minimis fringe benefit. In general, this type of benefit is one that, "considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical."
Health benefits would include blood pressure screenings, vaccinations, or other costs to diagnose, treat, or prevent diseases. Employers may also contribute to flexible spending or health savings accounts for employees on a tax-free basis or reduce an employee's premium costs when an employee participates in a wellness program.
Other benefits, such as gym membership reimbursements, are taxable to employees since they are not considered to be medical care expenses and are not considered to be de minimis amounts. If taxable benefits are provided, they should be included in the employees' W-2s, and payroll taxes should be withheld on the benefits.
How do bonuses affect taxes?
Bonuses are deductible by the business and taxable to employees. Payroll tax withholding can be computed in one of two ways.
- Add the bonus to an employee's regular payroll amount and use the standard withholding tax tables on the total amount.
- Use a flat withholding rate of 25 percent. The flat rate is often preferred because it results in a lower withholding amount than the aggregate method.
Note, too, that cash or gift cards provided to employees are always taxable as compensation.
What are the tax deductions for personal vehicles used for business purposes?
Employees who use their vehicles for business purposes can use the standard mileage rate or actual expenses to calculate their deduction.
- The standard mileage rate is $.57.5 per mile for 2015.
- Actual expenses can include gas, oil changes, repairs, insurance, and depreciation of the vehicle.
Regardless of the method used, employees must contemporaneously document their business miles or risk losing the deduction upon audit. Historically, this has required manually documenting each business trip. Now there are apps, such as MileIQ, that will automatically detect and log each business trip.
The actual tax benefit of an employee business expense may be significantly less than an employee expects: Employee business expenses are treated as miscellaneous itemized deductions and must exceed 2 percent of adjusted gross income in order to be deductible. If an employee is subject to alternative minimum tax, there is no deduction for miscellaneous itemized deductions at all. In lieu of an employee personally deducting business expenses for vehicle use, businesses may reimburse employees up to $.57.5 per mile for business related miles. The reimbursement is deductible by the business and is not taxable to employees.
Should I offer stock options as part of an employee's compensation in order to offer lower base salaries but entice talent?
For privately held businesses, stock options generally present more issues than benefits. There are accounting and tax reporting requirements that may require costly annual appraisals. Employers have to decide if they will arrange for employees to exercise options on a cashless basis by arranging for employees to borrow the money necessary to exercise the options.
If the business is taxed as an S corporation or partnership (i.e., a pass-through entity), the employees who exercise and hold stock will receive annual K-1 forms that will complicate their personal tax returns. Buy/sell agreements will be required to specify how and at what price shares will be purchased or redeemed from employees. There are other non-equity forms of compensation that can be used instead of options, such as stock appreciation rights, to incentivize and reward employees.
Is it better to upgrade to high-end office equipment or buy inexpensive equipment?
In large part, this depends on what is expected of the equipment and how critical it is to the business. Given the rapid pace of technological change, and absent a compelling need for more expensive equipment, it would generally seem more financially prudent to opt for inexpensive equipment. Of course, reliability, repair, maintenance costs, and potential down time—particularly with customer-facing equipment—must also be factored into this decision.
From a tax perspective, the Section 179 deduction is now limited to $25,000 and bonus depreciation is no longer permitted. Thus, businesses may be faced with a longer period over which the cost of equipment is depreciated, and this may also point to using less expensive equipment when there are not any significant business reasons for buying more expensive equipment.
How should my small business choose between offering an IRA or 401k?
A small business should first decide if it wants to provide a way for employees to make salary reduction contributions or if only employer contributions will be made. From there, an employer should determine how much of a benefit it wants to provide.
- A 401(k) plan will generally offer the opportunity for the highest annual contribution levels, although it does come with some additional record keeping and reporting responsibilities.
- An IRA plan is easier to establish and maintain.
- A Simplified Employee Pension (SEP) IRA allows an employer to make contributions on behalf of employees. Employees do not make contributions.
- A SIMPLE IRA allows employees to make salary reduction contributions and for an employer to make matching contributions.
The contribution limit for SEP IRA plans is higher than the limit for SIMPLE IRA contributions. 401(k) plans allow employees to make salary reduction contributions, employer matching, and employer profit sharing contributions.
Are there tax complications for companies with high turnover?
If a business doesn't offer stock options, stock grants, or other equity-based compensation, there aren't any particular tax complications associated with high turnover. There are likely to be increased unemployment tax liabilities if the employees who leave are eligible to collect unemployment based on the business's account.
If a high number of former employees claim unemployment, the business's unemployment tax rate may significantly increase, resulting in higher unemployment taxes in future years. If the business's unemployment account goes negative, the business will be saddled with the state's maximum rate, and could be for several years. The business should consider whether it would be worthwhile to make voluntary contributions to reduce the rate for future years.
How would my taxes be affected if I have employees working remotely in different states?
"The term nexus is used in tax law to describe a situation in which a business has . . . presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state." Creating physical nexus by having employees in multiple states has significant tax effects.
In addition to payroll tax filing withholding and filing requirements, nexus will cause a business to become subject to a state's income, gross receipts, and net worth or capital based taxes. It will also require the business to collect sales tax on taxable sales made in the states. If a business doesn't collect sales tax on taxable sales, a business may not be able to recover it from customers if there is an audit of the business. Even if the tax amounts are minimal, the compliance requirements can be daunting. Penalties and interest for noncompliance could be more than the tax liabilities at issue.
What should a business owner do if a tax bill is going to wipe out the company's finances?
Businesses or their owners are required to make quarterly estimated tax payments, so they should factor tax liabilities into their cash requirements planning. This doesn't always happen. If a business doesn't have enough cash to make the required tax payments, the business will have to look for financing or negotiate a payment plan with the IRS.
Payment plans, though, require a lot of information to be submitted to the IRS, and the IRS will require the business or owner to look for every possible source of cash, perhaps including the sale of assets. If a business has a bad year, it may generate a net operating loss that can be carried back two prior years. This would enable the business to recoup some of the tax paid in prior years. Lack of cash to pay taxes can also indicate a larger problem with its business model. The business should consider whether its expenses are too high or its pricing is too low.
Preemptively alleviate a client's tax confusion
Many business owners, especially those of small businesses, don't understand the tax code, making for a frustrating tax season. Client education can help reduce the stress and improve those relationships with an accountant; when clients are better informed, filing taxes is more efficient for both parties.