Tax preparation tasks tend to be one of the most dreaded business activities of small business owners—but they don’t need to be. In fact, tax returns can be painless when small business owners prepare for them throughout the entire year.
Because paying taxes is part of making money, it is essential to understand the tax implications of entrepreneurship—including the taxes you need to pay, the timing of payment, and how to best maximize business deductions. Below are some useful tips on how to get ready for this year’s tax season:
Keep track of all business expenses: Consistently tracking business expenses is a smart way to manage a business. Not only does bookkeeping help business owners organize themselves, but it also helps business owners predict expenses, control cash flow, cut costs, and prepare for tax season.
Save every receipt: Receipts allow business owners to document all tax-deductible expenses. Record the specific reason for the expense on each receipt and then scan the receipt, turn it into a PDF, or take a photo of it with a smartphone in order to digitally file each receipt. Expense-tracking apps are very helpful for business owners looking to record business expenses for each tax year. For example, Foreceipt, Certify, Receiptmate, Shoeboxed, and Expensify are good choices to capture and track expenses more effectively.
Record expenses quickly and efficiently: The last thing any business owner wants is a messy pile of receipts to wade through. As a result, expenses should be organized and recorded as soon as they occur to ensure your business records are organized and up to date.
Automate: Consider using accounting software, such as QuickBooks, to track all expenses. For example, QuickBooks can connect to your bank accounts, credit cards, PayPal, and Square, and then categorize your expenses. Business owners are able to develop custom rules to categorize all expenses, and run detailed reports to see how every dollar is spent.
Always keep business and personal separate: It is a smart idea to separate all personal and business expenses. Using a business credit card will enable you to use your credit card for only business expenses, and these credit card statements break down your spending into organized categories. In addition, combining business and personal expenses can leave companies open to problems with the IRS, so separating these expenses is advisable.
Conduct a regular review: Do not wait until the end of the year to review your expenses. Instead, conduct a regular review process (weekly or monthly) to ensure all business transactions are categorized in the right way and in line with your business budget. Proper expense tracking allows business owners to see the big picture when it comes to their business. And understanding this big picture leads to business success.
Keep original records: Good record keeping allows you to stay on top of your income and expenses. It also helps you avoid any problems associated with a possible IRS audit.
Don’t forget about quarterly taxes: If you owe taxes of $1,000 or more, business owners must pay taxes four times a year. You may face penalties if you do not pay at least 90 percent of the taxes you owe.
Choose the appropriate business structure: Business owners can structure their business in different ways. Because different business entities dictate how much you will need to pay in taxes and how you file, it is important to choose the business entity that is best for you. The most common options include:
—Sole proprietorship: This is an unincorporated business on your own. The profits solely belong to you, as do the risk and debt.
–Partnership: This entails sharing your business with others. General partnerships, limited partnerships and joint ventures are the main types of business partnerships.
–Corporation: This is a separate legal entity owned by shareholders in which the business holds all liability and debt.
–S Corporation: This type of corporation enables profits and losses to pass through shareholders instead of the business, which prevents double taxation.
–LLC: This entity protects its members from personal liability associated with debts and legal actions from the business.
Understand the many tax deductions for small business owners: Running a business incurs costs. And many of these costs are deductible if your business earns a profit. It is important to keep in mind that one of the simplest ways to reduce your income tax bill is to ensure you are claiming all of the tax deductions available to your small business. To help business owners understand the ins and outs of tax deductions, the IRS provides the following useful information on some of the most common tax deductions for small business:
Salaries and wages: Payments to employees, including salaries, wages, bonuses, commissions, and taxable fringe benefits, are deductible business expenses.
Contract labor: Many small businesses use freelancers or independent contractors to meet their labor needs. The cost of such contract labor is deductible.
Supplies: The cost of items used in a business, as well as postage, are fully deductible business expenses.
Depreciation: This deduction is an allowance for the cost of buying property for your business.
Rent for a business property: The cost of renting space (an office, storefront, factory, or other type of facility) is fully deductible.
Utilities: Electricity for your facility is fully deductible in addition to mobile phone charges.
Taxes: You can deduct licenses, regulatory fees, and taxes on real estate and personal property. Your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are fully deductible business expenses.
Insurance: The costs of your business owner’s policy, malpractice coverage, flood insurance, cyber liability coverage, and business continuation insurance are all fully deductible.
Repairs: The cost of ordinary repairs and maintenance are fully deductible, while costs that add to the property’s value are usually capitalized and recovered through depreciation. However, there are various safe harbor rules that allow for an immediate deduction in any event.
Personal and business expenses: While the IRS does not allow business owners to deduct personal, living, or family expenses, you are able to deduct expenses that are used for both business and personal purposes. The IRS permits you to divide the cost between business and personal parts, and then deduct only the costs pertaining to your business.
Using a house for business: Some business owners use part of their house for business purposes. As a result, the IRS allows these business owners to deduct home expenses, such as mortgage interest, insurance, utilities, repairs and depreciation.
Using your vehicle for business: Business owners who use their cars for business purposes can deduct their car expenses. Some owners use one car for both personal and business reasons. In this scenario, you must divide your expenses based on mileage. Keep in mind that the 2022 standard mileage rate for business travel is 62.5 cents per mile.
While starting a business is a very exciting endeavor, managing taxes can sometimes feel daunting. But understanding exactly how to navigate the tax maze can help you focus on making your business a true success.
Get started by forming your business online. Then we can work with you to prepare for the tax season. We’re here to answer your questions and guide your business to success. Form your free LLC today!