Beware of shady small business tax advice when you're staring out as a new sole proprietor. Of course you want to be tax savvy, and you should take advantage of all the tax benefits available to small business owners. Not doing so can cost you hundreds or thousands of dollars in taxes each year. At the same time, tax evasion or breaking tax laws can lead to losing your business, and your personal freedom. If you're doing your own taxes, without the help of an accountant or tax planning and filing software, then follow tax advice that's legal.
System for Record Keeping
The first step to getting the most tax deductions possible, and reducing your tax liability, is solid and consistent record keeping. It's a chore that many new sole proprietors avoid, and you too may be tempted to minimize or ignore this small business tax advice on record keeping. It would be a shame to have Internal Revenue Service (IRS) agents visiting your home and combing through you records, because you didn't take an hour or two each week to record your business transactions. Accounting software simplifies record keeping, and it's a must-have if you want to keep everything in one place, and have an easy way to analyze your finances after you enter it all.
When you keep records of all your business expenses, you can get the total amount for each category you spend money on. You're allowed to deduct 50 or 100 percent of some of those business expenses. Generate a list of all of your business expenses, even if it's just a print out of your budget, and highlight the categories where you're allowed to take deductions, such as:
- Gas mileage
- Home office equipment (depreciation)
- Home office for business use
- Publication subscriptions
- Membership dues
The IRS will review your tax forms to make sure that any deduction you take is "ordinary and necessary" to your business. Remember this small business tax advice when you create a budget: don't spend money on goods and services that are not related to your business. Pay for those out items out of your personal funds. If any of the expenses that you didn't highlight fall into the personal category, take them out of your business budget, and don't spend money on it from your business account again.
If you're making a transition from work to home, paying your own taxes quarterly is going to take some getting used to. You only have to pay estimated taxes January 15, April 15, June 15 and September 15 if you expect to owe more than $1,000 for the tax year. That's after tax credits and business deductions are applied. You may not have to pay any estimated taxes for the first year or two, especially if you have children who qualify as dependents.
The earned income tax credit and other personal credits that you can take advantage of may lead to you getting a tax refund instead of owing taxes. A tax planning and filing software, like TurboTax by Intuit, can be useful to figure this out. It will give you step by step guidance, and offer small business tax advice through the software and its online forums. You can choose to pay for live support from a professional.
You can research any small business tax advice related to federal taxes that you're not comfortable on www.irs.gov, to see whether there's a relevant publication or form, to verify that what you read or heard is true.
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.