To help you navigate this year’s filing, we asked local CPA Shelly Blaufeux of Continuum CPAs in Larchmont for her best advice.
What are some common tax mistakes businesses make that can lead them to pay more than they owe?
One big mistake is when a business does not have a good set of up-to-date books. Using QuickBooks, for example, is a great way to make sure your business is capturing all deductible expenses. We also always recommend using a business credit card and a business bank account—using personal accounts to pay expenses can create missed deductions and a bookkeeping fiasco. The IRS also does not like to see this type of commingling of personal and business expenses. Without a good set of books, tax planning and forecasting becomes nearly impossible.
Choosing the wrong business entity and failing to use the correct depreciation method are also examples of potential missed opportunities for deductions. Individuals who operate their business as a single member LLC essentially report their business income and expenses on their personal income tax return—making the above apply to them even more so.
“Without a good set of books, tax planning and forecasting becomes nearly impossible.”
What industry-specific tax incentives or credits should small businesses look for?
There are numerous ways small businesses can maximize their tax deductions. Two smart moves are utilizing the Section 179 deduction, which allows businesses to deduct, for example, qualified equipment purchases, and claiming the 20% Qualified Business Income Deduction, which allows eligible small business owners to deduct up to 20% of their net business income. A business owner can also maximize the home office deduction when operating a business from home. I am a huge fan of pushing my clients to save for retirement by contributing to an SEP-IRA or a solo 401(k), when possible.
Can you still claim expenses if you’ve lost receipts?
Yes, you can. However, you should always be prepared to back up your deductions in case you get questioned by the tax authorities. Alternatives to a receipt include canceled checks, bank statements, credit card statement, written records created by you, calendar notations, and photographs of purchased items. Under the Cohan Rule, which allows for some flexibility in proving expenses, the IRS may accept alternative forms of documentation. I highly recommend implementing a digital management system for all expenses. The problem is that claims are typically questioned many years down the road, so without some system in place it can become a big nightmare to produce the required documentation.
For high-income earners who may be phased out of their Roth contributions, would you advise a back-door Roth IRA?
First, let me explain what a back-door Roth IRA is: An individual would open and fund a traditional IRA with after-tax dollars. Then, they would convert the funds in that traditional IRA into a Roth IRA. While this can be beneficial for high-income earners, in some situations it can also be a trap for the unwary due to the Pro-Rata Rule. This rule can apply if someone has other existing traditional IRA balances, potentially resulting in taxes on the conversion. This brings up the question about a Roth conversion—something I work very closely with. Every situation is different, but the big picture is that a Roth conversion will certainly make a lot more sense in a very low-income year. Some examples of that are if you started a business and incurred some initial losses or made a large charitable contribution that calendar year.
How will taxes change for businesses under the country’s new administration?
I believe with the new Trump administration we may see some tax law changes in the years ahead. During his first term in office, Trump helped pass the Tax Cuts and Jobs Act (TCJA). Many of the provisions are set to expire at the end of 2025, which means he may not only extend the TCJA, but also potentially expand his tax agenda. We saw with the TCJA the doubling of the standard deduction as well as the increasing of the child tax credit. The top tax rate for high-income taxpayers was reduced from 39.6% to 37%. The TCJA also limited the deduction for a company’s net operating losses to 80% of taxable income. In addition to extending the TCJA, Trump promised a variety of other tax breaks, such as eliminating taxes on tipped income, overtime pay, and retirees’ Social Security benefits.
