The deadline to file income-tax returns doesn’t arrive until April 18 this year, but the later date may be small consolation to small-business owners – and especially sole proprietors – who are completing their returns themselves.
While there are several deductions that can help small-business owners significantly lower their tax bill, they are also the most complicated. The home office deduction, for instance, is determined through a complex formula. The auto expense reduction requires rigorous record—keeping that should start in January.
To stay within IRS rules, the home office must be a place in your home that is used exclusively for business. Your deductions also can’t exceed the square footage of your home office, divided by the total square footage of your home.
Home office expenses must also be reasonable, such as less than 10 percent of your total deductions.
As for auto expenses, they can be deducted in one of two ways: through allowed mileage, or through actual car expenses. To determine which method works better for you and leads to a bigger deduction, consult IRS Publication 463. It’s available online.
Following the IRS rules for both the home-office and auto-expense deductions will help you avoid being audited. But being overzealous with other deductions may raise red flags. Large, out-of-the-ordinary deductions – especially if they exceed your income for the year – can trigger an audit.
Remember, too, the April 18 is the day that estimated taxes for the first quarter of the year are due. By not sending a payment, you risk If you’re not sure how to estimate your taxes for the current year, divide your taxable income for 2016 by four and send in that amount.
If you don’t think you can get your return done in time to meet the April 18 deadline, you can file a request for a six-month extension by using IRS Form 4768 or visiting www.irs.gov. But…remember that the extension is to file your taxes, not to pay your taxes. As a result, it’s important to send in an estimated tax payment or run the risk of incurring interest penalties later in the year.