With the economy doing so well many Americans may look at it as an opportunity to start their own business. However some do not realize all of the things that are associated with that. One important thing is that income taxes become the responsibility of the business owner. To lower the pain of taxes as much as possible here are some tips that should help:
First the business owner should have a good accountant for tax and financial advice. Organization and good record keeping are keys to lower tax preparation fees. Bringing a shoe box or a bunch of receipts to your accountant will undoubtedly cost you more in the time that it will take to arrive at tax return numbers.
Here’s a rundown of some expenses to track for tax return preparation:
Auto expenses: You may deduct mileage, parking fees and tolls for the business use of your car. Most people take the standard mileage rate deduction because the record keeping requirements are less burdensome, but actual expenses often yield a larger deduction. It is important to keep track of the mileage, odometer start and finish for each trip, destination, the starting point and business purpose. Today many people use a phone app called Mile IQ for this purpose. The actual expense method often yields a higher deduction, including repairs, insurance, maintenance and depreciation for the BUSINESS portion of use. If the actual expense method is used the receipts should be kept as documentation.
Professional and legal expenses, and association dues: Professional and legal expenses are deductible, but if the costs are part of the business startup expenses, you may need to amortize the cost over 60 months. Association dues may include a portion for political contributions or lobbying, so that part cannot be deducted.
Expenses to start up or expand your business: The biggest mistake in deducting expenses to start up or expand your business is failing to make an election to amortize or deduct these expenses in the first year. An election is required to be attached to the return, stating your intention to amortize them. Otherwise, the expenses become nondeductible until you sell or liquidate the business.
Home office: If you have a legitimate home office, do not be afraid to deduct it. To qualify, the room must be used exclusively for business. It cannot double as a spare bedroom or toy room for your kids. You can deduct a portion of your rent, utilities, insurance, taxes, maintenance, professional cleaning, depreciation and interest. The amount is based on the size of the home office.
Telephone and internet: Any dedicated services for your business are deductible. If you use your home or personal cell phone for business, you may only deduct the portion that is used for business purposes.
Education and training: You may deduct the cost of continuing education or certification for the business you’re already in, but any education that qualifies you for a new line of business is not deductible.
Interest on loans: You can fully deduct interest on loans for your business. If you have a loan from a relative, make sure that it conforms to IRS rules.
Travel expenses: Keep a log of who you met, where, when and for what business purpose. Keep in mind that only fifty percent of the cost of business meals is deductible.
Insurance: Insurance premiums for the business for one year or less are deductible currently, while excess prepaid premiums are deductible in subsequent years.
Taxes and Social Security: Self-employed individuals are treated as both an employee and employer for income tax purposes. Set aside at least 30 percent of what you earn to cover quarterly estimated tax payments. If there is an over payment that is better than having underpayment penalties.
It should be noted that for all business expenses receipts are necessary as supporting documentation. In case of audit the IRS will likely disallow any deductions that are reported on a tax return without them.