Small business tax planning doesn't have to keep you up at night. No one likes to think about taxes, and the thought of owing high taxes can cause a lot of pain. Avoid the stress of tax planning with these tips:
1. Freelancer or Small Business Designation
Perhaps the economy is in rough shape, or things aren't working out as fast as you thought. If your business is new or started late in the tax year, you may want to hold yourself out as a freelancer for tax planning purposes. There are different tax requirements for independent contractors than there are for small business owners. As a freelancer, you'll be adding the money you made to your personal income. It's not a good choice if you've invested money in capital expenses, such as equipment, inventory or a vehicle, because you'll miss out on tax and depreciation deductions. If you don't have any capital expenses, and only spent money on Internet access, telephone bills and web hosting, then you need to decide whether it's better to file taxes as an independent contractor until you generate more income and make more purchases for your small business.
2. Year-End Small Business Tax Planning
Before the year closes, you should consider making some purchases sooner rather than later. It doesn't make sense to buy items for your business that you don't need, just to take business deductions. You can end up losing money that way. It is wise to make purchases before the tax year ends, if you were planning to make them anyway. For example, don't put off buying goods or paying for services that are "ordinary and necessary" for your business. The Internal Revenue Services will only allow you to deduct expenses that are necessary for you to carry out your business and typical in your line of work.
3. Business Bookkeeping
It can't be stated enough, the need for great bookkeeping. Sloppy bookkeeping can lead to many mistakes, all of which will cost you something. Bookkeeping doesn't have to be complicated. It takes time, and you'll commit less errors when you use an accounting software, like Quickbooks by Intuit. There are also virtual bookkeepers that can help you with all your bookkeeping needs, but you'll have to exercise caution and do background checks before hiring one. When your financial records are in order, you can refer to them easily for small business tax planning. For example, the business expenses you can deduct will be right at your finger tips, and not lost in piles of bills and miscellaneous receipts.
4. Healthcare Reform
Small business tax planning has changed in light of healthcare reform. Most of the changes will occur in 2013 and 2014, giving you enough time to plan accordingly. However, it's good to start planning now, since successful businesses have a three to five year business plan, including a tax plan. You'll need to learn about the tax credits available for your business, as each is different. A small business accountant can advise you properly on how to plan for taxes related to healthcare.
Tax software can also be helpful with small business tax planning. It's a good idea to use financial software for taxes and other business related tasks whenever possible to minimize errors.
Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.