As an entrepreneur, you are busy managing various key functions of your business. If you are like most entrepreneurs, you are thinking about taxes only around the tax filing deadline.
Around tax time you may soon find out that either you are paying too much in taxes or that you withheld too less in taxes which in turn can prove to be a tax compliance nightmare for your business. To avoid these most common mistakes and deadlines, we have put together this quick list of tax tips for entrepreneurs:
1)Choosing the right type of entity structure: The reason this is on our # 1 list is that this is the first and most important decision you will take for your business and yet so many times the entity structure is not right. This often results in either a surprise tax bill or a disappointment to the founders/entrepreneurs regarding how losses or profits are handled in their entity. Therefore, we strongly recommend reviewing your situation with a CPA who can review your projected financials and get a better understanding of your long term goals. The next step then is to have a basic understanding of how taxes will be handled and then take a final decision.
2)Business Startup expenses – Startup expenses that are up to $5,000 can qualify for a valid business deduction. This can be taken as a business deduction the same year. This covers legal and company formation fees paid in connection with creating/ acquiring another business. If costs exceed $5,000, these costs can be amortized over a period of 15 years. Certain limitations may apply for costs over $50,000.
3)Business Miles - Entrepreneurs can take 53.5 cents per mile as a business deduction or can claim a proportionate share of car actual expenses that were used for business purposes.
4)Home office deduction - If you run your start up from your home, you may be eligible for the home office deduction. There are two methods, one is called as the simplified deduction that allows you to take up to 300 square feet @ $5 per square foot. The actual method allows you to take a prorated share of all the actual expenses that were used for business expenses. This may include utilities, telephone, fax expenses etc.
5)Depreciation –This is the reduction in value of an asset that needs to be written off each year as part of normal wear and tear. For income tax purposes, there are specific guidelines based on asset class and the type of depreciation that is allowed on the tax return.
In order to deduct this expense:
The taxpayer must own the property.
Item must be used in regular business income generating activity.
The property should have a determinable useful life of more than a year.
6)Intangibles: Similar to the depreciation of tangible property, there are specific tax guidelines for intangibles; e.g., patents, business books, operating systems, customer lists, copyrights, and computer software. These can be amortized over a period of 180 months. They are often referred to as 197 intangibles. Certain restrictions exist based on the premise of the intangibles that were created/acquired.
7)Customer gifts: You can deduct all or part of the cost within $25 limit per gifts are given to customers.
8)Travel and baggage expenses: The expenses that you incur during a business trip can be deducted. These include:
Airfare, train, bus or car expenses to your business destination.
Baggage and shipping costs to and from your business destination.
Car or truck expenses incurred in the operating and maintaining of your vehicle, g., parking expenses at the airport.
9)Self-employed Retirement accounts – There are 4 types of retirement plans available for the self-employed:
SEP IRA- Simplified employee plan: Best suited for self-employed and small businesses with any number of employees. Employer makes the contributions.
SIMPLE IRA- Best suited for businesses with less than 100 employees.
Self Employed 401 (k) plan- This plan is best suited for businesses with no employees.
401k plan- Ideal for large companies.
10)Professional CPAs : It's always recommended seeking the services of a professional who is an expert in dealing with tax matters and who is also familiar with your industry The business portion of the tax preparation fees can be deducted on the business return (Schedule C). The portion of the fees incurred as a result of preparing your personal tax needs to be reported on the itemized portion of Schedule A.
11)Health insurance deduction - You may be eligible for self-employed health insurance deduction. This is considered as a deduction to income rather than an itemized deduction. If you do not claim 100% of the deduction, the remaining can be claimed as an itemized deduction on your personal tax return.
12)Environment-friendly vehicle purchases (IRC 30D) - If you have purchased a hybrid or an electric car, you may be eligible for Plug-in Electric Drive Vehicle Credit. IRS tax credit is between $2,500 to $7,500 per every new electronic vehicle purchased in the United States.
13) File an extension: If you are unable to prepare taxes by the tax due date, you can request your CPA to file an extension form 7004. The extension is additional time to file the tax form, not an extension to pay the tax due. So, please ensure you estimate your taxes correctly to avoid penalties and interest.
14) Estimating your quarterly taxes for your startup - Each quarter you are required to estimate your taxes due to the federal and state government. Any missed payments usually will result in penalties and interest. So, ensure you estimate your taxes accurately. Below are due dates :
January 1 – March 31
April 1 – May 31
June 1 – August 31
September 1 – December 31
January 15* of the following year.
15) Keeping business and personal expenses separate: If you can from the first day of starting your new venture, ensure you have two separate banks, credit cards. It’s very easy to mingle both funds and it can either result in missed business deduction or incorrect classification as a business expense that can prove to be a costly mistake when your tax returns are audited. Therefore, we always recommend keeping it simple, easy and separate for business and personal expenses.
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