4 Ways You Are Overpaying on Your Taxes, Part One: Charitable Donation or Advertising Expense?
Updated: May 30, 2019
Welcome to part one of our four-part series: Four Ways You Are Paying Too Much in Business Taxes. Over the next four weeks, we will discuss some of the common mistakes that small business owners make when filing their taxes and what you can do to avoid making them.
Four Ways You Are Paying Too Much in Business Taxes
At times, as business owners we feel like we are bleeding money. The rent goes up. That annual conference you attend is on the horizon. Your employees need a raise. The list goes on and on. Of course, increasing revenue is a good way to help with cash flow, but we are also happy when we discover ways that we can save money as well. What I’ve found in working with scores of business clients is that many are overpaying their taxes and not taking advantage of deductions to reduce their tax burden. The first way for you to consider reducing the taxes you owe, is by reviewing your charitable donations.
Is that a charitable donation or really an advertising expense?
The first way that many small businesses end up paying too much in taxes every year is because they show charitable contributions as, well, charitable contributions. Now that standard deductions are much more common because the amount has been doubled, and people are not itemizing as much, charitable contributions for many taxpayers do not actually carry any benefit. But if you own a small business, it's entirely possible that some of those charitable contributions are actually advertising.
Now, we want to be careful here. I'm not saying anything you used to call a charitable contribution is actually advertising. What I am saying is if you make a payment to a nonprofit for, say, an event sponsorship or something that brings exposure for your business, the fact that you are writing a check to a nonprofit does not automatically make it a charitable contribution. It could be that the amount you're paying to the nonprofit actually counts as advertising.
Reclassifying this could bring big savings! As a sole proprietorship, you pay 15% self-employment tax. Let's assume you also pay 10% Federal income tax, and if you're in Missouri like I am, you probably pay 6% Missouri tax. Six percent plus 15% plus 10% means you're paying 31% in overall tax. If you spent $1,000 for a sponsorship that could count as an advertising expense, you can deduct that 31% from your taxes. If you submitted it as a charitable contribution, you get no deduction.
If it can be reclassified as advertising, you now have $310 more in your pocket at the end of the day. That's not going to make or break your business, but why would you pay $310 too much? You probably don't know about this rule and the average tax preparer that isn’t business-focused likely doesn't know either. At the very least, it's not something that they have on their list to double check with every client because they probably do way more individual tax returns than they do business owner tax returns.
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