9 Tax Tips Every Business Owner Needs to Know
Owning a business can be an extremely fulfilling endeavor. When it comes to taxes, however, there are a lot of ins and outs involved in terms of understanding how the tax code works to ensure you're doing everything right.
Like many business owners, when tax time arrives it can be a complicated and confusing time; but you’re not alone.
Read on for a list of nine tax tips every business owner should know so that you can be prepared for tax season like a true professional.
1. Make Sure You're Saving
When tax season arrives, you could be in for an unpleasant surprise if it turns out that you owe the IRS. One way to avoid this issue is by planning ahead and saving a portion of your profits.
As a business owner, you should be paying taxes back to the IRS with every quarter of the calendar year. These quarterly taxes are particularly important for the self-employed and sole proprietors who don't have any money taken out from a direct employer.
If you don't pay your taxes on a quarterly basis, you'll be subject to a variety of fines and interest charges. Prevent this by putting a percentage of your income or profits away, and then pay your quarterlies on time.
Unfortunately, many business owners neglect to save their money and end up owing quite a bit of money at the end of the year. Use an online calculator to determine how much money you should be putting aside. This also applies to state taxes.
2. Use Your Retirement Plan to Your Advantage
Small business owners have lots of great options for retirement savings plans even without a large employer contributing. Plans such as the SIMPLE IRA and the SEP-IRA give you a way to save money for the future.
Each plan has a different threshold for how much you and your employees can contribute. Every contribution made for yourself and for your employees is tax-deductible, which can reduce the amount of taxes you'll need to pay.
Keep track of how much money you've put aside throughout the year for your retirement plan. As long as you didn't withdraw any money, the total amount of your contributions should be tax-deductible. Your plan administrator will issue you a form at the end of the year that breaks down your total contributions so you can use it when you file.
3. Charity-Related Tax Tips
Not only does giving to charity make you feel good, but it also has a few tax advantages as well. When you give money to a nonprofit charitable organization, it's a great way to engage your employees and the community while reaping a few tax benefits.
If your business is donating property, you can claim the fair market value of each item donated. Some charitable gifts have limits, so check with your accountant or the IRS for more details.
For businesses or the self-employed who choose to claim the standard deduction, you won't be able to write off your charitable gifts or donations. Make sure you go over your specific plans for charitable giving with a professional tax specialist. They can help you determine whether the amount you give will be larger than the total deductible to gain a benefit at tax time.
4. Put a System in Place
As an employee of a company that receives a W2, you don't need to worry about tracking things like invoices and payments. However, business owners need to have a specific strategy in place when it comes to their accounting.
Before you even begin a business, you should have some kind of accounting software or filing system at the ready. It’s highly advisable to track every single dime that comes in and goes out of your business so that you can better balance your profits or losses.
When you create a streamlined system, it's much easier to give accurate amounts when you file your taxes. Keep a running tally of your sales, costs, and total bottom line so that you can simply plug the numbers in.
We also recommend keeping all receipts for items spent on your business. Using a receipt scanner can help mitigate any issues with juggling paperwork. Think about the different ways you can streamline your accounting so that tax season isn't something your business dreads.
5. Are You New? Don't Forget Startup Expenses
If this is your first year in business, you may be able to deduct the costs to start your business. Many small companies are able to deduct things like the cost of a business license, permits, and setting up an LLC.
The IRS should explain which items are considered startup costs so that you're clear on what you can and cannot claim. Keep thorough records of every single penny you pay out of pocket to get your business off the ground.
In some states, you may even be allowed to forego taxes your first year in business. Talk to a tax accountant who can help you navigate the rules of your state as well as the federal government.
6. Track Your Car Costs and Mileage
If you have any car-related expenses that are in direct correlation to your home business, the IRS allows you to deduct them on your tax return. You may take the standard deduction based on the miles you drove or the actual expenses of your vehicle.
If you want to take the mileage deduction, you'll need to keep a good record of how many miles you've driven. Keep in mind that the total number of miles driven only refers to the times you drive to and from a meeting with clients, to deliver your products or any other trip that is directly related to the operation of your business.
You can track the miles you drive by jotting them down in a small notepad you keep in your glovebox. There are also new smartphone apps that let you track business miles for quick and easy recording.
If you prefer to take the car expense deduction, you will need to track every expense that your vehicle incurred including maintenance, gas, and repairs. Again, make sure that you're separating these costs from your personal use of the car so that your numbers are accurate.
7. Remember Other Deductions
Running a business is expensive, but you can deduct a variety of these costs from your taxes each year. Many business owners avoid claiming deductions for fear of an audit, but the IRS has relaxed the rules in recent years. Just make sure that you only take the deductions that you actually qualify for.
If you work out of your home, you're able to deduct a certain percentage of the space you use for your office. Other items like Internet costs and utilities may also be included as a deduction.
The home office deduction states that you must regularly and exclusively use a specific part of your home for running your business. Your home must also be the principal place of business, which means you can't claim it if you have an actual office somewhere outside of the home.
Other items you can deduct include the cost of equipment and supplies. Everything from a new computer to printer paper and pens can all be deducted as a business expense. Overall, if you're spending money out of your pocket to do business, you can likely deduct it on your return.
8. Structure Your Business Correctly
The way your business is structured is one of the most important tax tips. How you classify your business can have a significant impact on your tax returns.
If you run your business all on your own and get all of the profits and take on all the risks, you can register as a sole proprietor. If you share ownership of the business with at least one other person, this is classified as a partnership. However, there are different types including general and limited partnerships or joint ventures that all have different legal obligations for each partner.
As an LLC or limited liability company, you own the business yourself or share it with others, but you remain protected from personal liabilities related to debts or legal action. As an LLC, you won't need to pay corporate taxes, but you will need to pay self-employment rates throughout the year.
Other business structures include an S corporation or a corporation. It's a good idea to speak with a business accountant who understands which type of classification applies to your business, and which one is most beneficial.
9. Stay Informed
The tax laws are constantly changing, so it's crucial to keep ahead of the tide. Pay close attention to current laws or proposed laws so you're always prepared when a change comes your way.
The IRS website is a great resource to keep you informed of any updates or changes to the business tax code. When in doubt, talk to an accountant who can educate you about any new updates or changes you might need to make in order to stay in compliance.
When it comes to business taxes, knowing the law is the key to success. Do your homework and be prepared to adapt whenever new changes are put in place.
Be Ready at Tax Time
Whether your business is a sole proprietorship or an S corporation, these tax tips will help to ensure that you're getting the best return possible. Keep good records and remember all of your possible deductions so you can enjoy a smooth and stress-free tax season.
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