By Jennifer Warawa
The end of March not only marks tax crunch time but also National Mom and Pop Business Owners Day. March 29 celebrates small business owners and their vital part in the economy. There are more than 28 million privately-owned small businesses in the United States. Some of these businesses are new startups, while others are handed down from one generation to the next. What these small businesses all have in common are hard-working, dedicated owners who wear many hats.
As April 15 draws near, it’s time to break out your accountant hat and brush up on all of the latest tax code changes for your 2014 taxes. Knowledge is power and, in this case, that power may be able to bolster your bank account. Learning about all of the latest tax changes could minimize your tax liability and strengthen your business’ bottom line. If you don’t have an accountant hat or feel confused by all the changing regulations, then engage with an accountant who can ensure you maximize your tax savings.
While the rest of the nation shows your business some love this Mom and Pop Business Owners Day, love yourself with these four things that you need to know before Tax Day:
Who qualifies for the Home Office Deduction?
Many small business owners keep only an office in their home. But, many don’t take the home office deduction because they perceive it to be a red flag for an IRS audit. If you are legitimately entitled to the home office deduction – which means you have a dedicated space in the home that you can prove you use solely for the business and nothing else – you should take it.
In 2013, the IRS introduced an option to use a simplified method of calculating this deduction with revisions to Form 8829. Prior to this change small business owners needed to add up the actual costs (mortgage/rent, utilities, etc.) and multiply that figure by the percentage of the home that’s dedicated to the office. Now, you can choose to take a deduction for each square foot of office space, up to a certain amount. (Note: this is currently $5 a square foot up to $1,500, but may change year over year.)
This simplified deduction method is good to use if you haven’t kept track of your home expenses or don’t have documentation to back up these expenses. That said, be careful, and don’t take this deduction if you work on your dining room table.
How has the Section 179 Deduction changed?
If you’ve bought new equipment for your business in recent years, then you should be familiar with the Section 179 Deduction, which previously had a $500,000 limit. While the IRS had reduced the deduction maximum to a significantly lower $25,000, luckily the lower limit will not be put into effect until after tax year 2014. Take advantage of this deduction while you can and be sure to claim any software, vehicles or equipment that fall within the current $500,000 limit in IRS Form 4592.
How does the Affordable Care Act affect your business?
While it was highly publicized in the media that companies with over 50 employees are most affected by the Affordable Care Act, companies with fewer than 50 employees are impacted as well. If you choose to provide health insurance to your employees, you may be eligible for higher tax credits this year. The maximum tax credit for for-profit small businesses has risen to 50 percent from 35 percent of the total of contributions to employee health insurance. For non-profit companies, this credit has risen to 35 percent from 25 percent.
While this tax credit could potentially save you significantly in tax liability, it does not come without strict guidelines. All health care insurance must be purchased through the Small Business Health Care Exchange and you must pay at least 50 percent of your employees’ health care coverage premiums. The credit is also granted on a sliding scale depending on how many employees you have and it decreases with more employees. For instance, you can only have up to 10 employees in order to get the maximum credit of 50 percent. While all of these qualifications may be frustrating to meet, if you do it is certainly worth your while.
What’s the current mileage rate?
While mileage rates have been increasing in recent years, 2014 has seen a half-cent drop, bringing the standard mileage rate to 56 cents per mile. If you plan to claim mileage deductions on your taxes, be sure you are getting the most from the deduction by keeping accurate records of your yearly vehicle usage. Does 56 cents per mile seem a little low for your specific vehicle usage? The IRS notes that you are always entitled to calculating your actual usage costs as an alternative to using the standard mileage rates to determine your deduction.
Jennifer Warawa is Vice President and General Manager Sage Accountant Solutions at Sage North America. Jennifer has a passion for entrepreneurs and small business that stems from her time as a small business owner for over a decade in her hometown of Kelowna, British Columbia. In her role at Sage, Jennifer is leading efforts to provide accountants with the technology and education they need to transform their firms and better serve their clients. Follow her at @JenniferWarawa.