If you are venturing out on your own, congratulations! Starting your own business can be tremendously rewarding if you do it right. From business plans to market strategies, there are a lot of important financial decisions ahead.
So, let’s start you off on the right foot. Here are 5 tax tips to help you get started.
1. Operate as a Business, Not a Hobby
Losses from a hobby are not tax deductible, so it is important for the IRS to view your business as having a reasonable expectation of earning a profit. To demonstrate this, write out a business plan and document your marketing and management efforts. The IRS presumes that your activity is a business if it makes a profit during at least three of the past five tax years.
2. Document Your Income and Expenses
You are required to keep track of your income and expenses so that you can accurately report them to the IRS on your annual tax return. Keep track of car mileage, the cost of a computer you buy for business use, daily appointments, and anything else that could help you to substantiate your tax deductions.
3. Report Your Income as You Receive It
Most small business owners find it beneficial to report on the cash method of accounting, where income is reported as it is received rather than when it is billed, and expenses are reported when paid. Typically, businesses with average annual gross receipts of $27 million or less in the prior three-year period may use the cash method. The cash method gives you greater flexibility to save taxes by shifting income and expenses between years.
4. Deduct an Office In Your Home
If you regularly and exclusively use part of your home to perform administrative or managerial activities for your business, you may be able to claim a home office deduction for a portion of your expenses related to utilities, rent or mortgage interest, cleaning and the like. You can even take this tax deduction if you provide products or services at other locations.
5. Choose Your Business Entity Carefully
Many small business owners rush to incorporate their business when the truth is that it may be more costly to incorporate for someone who is self-employed. Once you incorporate, you will be subject to additional costs like payroll taxes on your income. This includes worker’s compensation and unemployment taxes. You may also be responsible for an annual franchise tax in the state in which you operate. Also, before you incorporate, remember that business deductions are generally the same for self-employed people as they are for corporations.
Don’t worry about knowing these tax rules and how to claim business income and expenses. With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.
