For small business owners tax season is a time of dread. Will you owe money? Have you overlooked any deductions that will impact how much you owe or how much of a refund you receive? Here's an insider look at additional tax breaks you may have overlooked.
Tax Preparation or Do It Yourself?
One of the first questions every small business owner must answer is whether to do their own taxes or use a tax preparer. There are advantaes and disadvantages to both. Many times, accounting firms know of tax breaks and the latest changes of which you might not be aware. This can result in savings of hundreds of dollars for your small business. However, it does cost money to pay someone to preprare your taxes. Many sole proprietors do not like to share such personal information with an outside party either. Just remember, if you do use a tax preparation service, you can often take the cost of that service off on your taxes next year.
S Corp or Sole Proprietor
Although you should always consult with a professional to learn all the consequences of incorporating, many small business owners choose to form an S corporation to save money on self-employment taxes. This can save thousands of dollars a year for small business owners.
For example, although you'll still have to pay yourself a reasonable salary, any amount above and beyond that can be paid out to you as the shareholder, tax free. So, if your business earns $95,000.00 in a given year, and a reasonable salary in your line of work is $65,000.00, you just saved paying taxes on $30,000.00.
On the downside, there are many forms and some record keeping that you'll have to stay on top of if you choose to form an S corp. You can read more about this process and the pros and cons at TheMoneyAlert.com.
Start Up Costs
The IRS allows you to deduct reasonable start up costs for beginning a new business. Although the amount sometimes changes each year, there are often several thousand dollars worth of expenses that can be deducted. Since many businesses are not profitable in the first year, this can help a new and floundering business get off the ground. Start up costs might include advertising, equipment, leasing office space, sending out letters to announce the business opening and any products that are purchased to name a few. Check the current tax code for the year you're filing to see how much you can possibly deduct.
Many small business owners, particularly home office workers, don't bother with logging mileage. However, the tax code allows you to deduct miles used on your personal car for business trips. So, all those ten mile drives to the bank, twenty mile drives to the office supply store and quick trips to the post office can really add up over time. The easiest way to keep track is with a little log book, but if you've forgotten, there is another way to track your mileage from last year. You can gather the needed information through your receipts.
Gathering needed information includes taking a look at the following:
- Bank deposits. For any deposits or business related bank trips, simply make a note of the day and where you went.
- Office supply receipts. All those Staples receipts are a good indicator of when you took a trip to get supplies for your business.
- Business meetings. Take a look back at your calendar to see where and when you met with business clients outside of your home.
Now, you will have to have the address and a tool such as MapQuest to figure out the exact mileage of your trip. Next year, try to remember to log trips as you take them. Since the current deduction for mileage is 50.5 cents per mile. This can really add up to a huge tax savings over the course of the year.
Make Travel Business Related
Try to combine any and all travel with business dealings. Although you can't deduct any personal spending or family member spending, you can deduct 50 percent of reasonable travel expenses. You also are not required to work the entire time you are on your road trip, so it's fine to do a bit of sight seeing. Many small business owners have been warned that this is an area where audits are likely to occur, so they often choose to simply not take this deduction. However, if you are honest, keep receipts and only deduct reasonable expenses there is no reason to fear an audit. An audit is unlikely, but in the case you are audited, you'll simply need to present proof that the trip was for business and the receipts to back up your spending. For more tips on avoid an audit read Tips for Avoiding a Tax Audit.
One of the best things you can do to save money on your taxes as a small business owner is to keep careful records and receipts. Since home offices are typically casual, it becomes too easy to purchase printer paper at Wal-mart along with your family's grociers and forget to deduct the paper in your expenses. It would be far better to buy the paper separately and keep the receipt in a file box. You can always jot a short note on the receipt about what the item was for and then organize the receipts later. With a little forethought and organization, you could save thousands more on your taxes this year.