For William Cummings, who was chief financial officer of a major company, it was an aha moment. The company he worked for had far more revenue than he had income, but the organization paid less in taxes than he did individually. That discrepancy led him into the business of providing tax planning for small businesses, which he defines as companies with fewer than 50 employees.
Cummings’ book, Bad Luck or Bad Business? 13 Most Common Tax Mistakes Made by Business Owners, hits some of the high points. Over and over, he sees the following tax mistakes:
✔ Companies operating under the wrong entity. A business entity might be an S corporation, a C corporation, a limited liability company or a proprietorship. And tax situations change: “Just because you started off with one doesn’t mean you have to have it five years later,” he says.
✔ Missing out on a health care tax credit. Under the Affordable Care Act, businesses that provide group health insurance may be eligible for a tax credit. Government Accountability Office figures show that in the first year the credit was available, 2010, only 170,000 businesses took advantage of it, while as many as 4 million were eligible.
✔ Not deducting a home office, if you qualify. This is “the most misunderstood deduction in the entire tax code,” Cummings says. He outlines what can be considered a home office and how to figure the expenses. Congress has relaxed the rules, so a home office deduction is no longer a red flag, he says.
This time of year, most of us deliver a stack of receipts and spreadsheets to our tax preparers and trust that we will pay no more than our fair share. To pay the least in taxes, Cummings says, small businesses must learn to do the tax planning that bigger companies do.