Tips for Practitioners | Tax Tips for Small Businesses
What business wouldn’t like to save a little on its expenses? A good cost-saving measure can be achieved by minimizing your tax liability with the Internal Revenue Service (IRS). The beginning of the year is the perfect time to do a check-in with your firm. Here are a few tips that can help shave money off your tax bill and in turn positively impact the bottom line by increasing net profits.
Make sure you have the proper business structure. There are many different options available to business owners when deciding how to structure a business. Law firms are no different. Each business structure has different levels of liability, reporting requirements and tax implications. The most common types of business structures are the sole proprietorship, partnership, limited liability company and corporation. Keep in mind that your needs can change over the years, so just because one business structure has served your needs in the past does not mean it is still the best option for you. Consult a business attorney in your state for specialized advice.
Keep accurate records on travel, meals and entertainment. Don’t limit your business deductions to rent, office supplies and salaries paid to your staff. Expenses for travel, meals and entertainment can also be written off if they are incurred while pursuing a clear business purpose. In addition to airfare and hotel costs for traveling to conferences and meetings out of town, mileage can be a big expense for lawyers. Make sure you keep track of mileage traveled from your office to client meetings and temporary work locations. Commuting expenses from home to work, however, are not included. Travel logs can be helpful here. Your log should include the starting point and destination, business purpose for the trip and the total number of miles. For meals and entertainment, you should keep notes on who attended the meal or outing, the business purpose and what was discussed.
Prepare as you go. The best practice is to keep all receipts, tally expenses and review financial records on a regular basis (at least monthly). Some smaller practices can keep this information organized in a series of Excel spreadsheets; however, it is most helpful to use an accounting software and/or accountants to track expenses, accounts and payroll. The more organized you keep your financial records, the easier it will be to prepare for the filing season or address any concerns the IRS may raise in an audit or examination.
Hire an experienced tax preparer. Many business owners have a tendency to want to cut corners here, but you should resist the urge. An experienced tax preparer can ensure your return is prepared accurately, give you the appropriate advice on how to make adequate tax payments to the IRS throughout the year and save you the headache of paying more money in the long run in the form of penalties and interest. Additionally, the actual amount you spend on tax preparation services is deductible on your return the following year.
Be aware of the tax consequences of your client’s transactions. In many cases, you may be negotiating settlements and other transactions on your client’s behalf. Recognize you are not a tax professional. There is a right way and a wrong way to structure many transactions from a tax perspective. You should be aware of those circumstances that involve tax implications and consult a tax attorney to ensure you are getting the best outcome for your client and not committing malpractice.
Tameka E. Lester is an assistant clinical professor and serves as associate director for the Philip C. Cook Low-Income Taxpayer Clinic. In addition to the clinical course, Lester teaches Basic Federal Taxation. Her areas of expertise are clinical teaching and taxation for individuals and small businesses.