April 15th --- a day that lives in infamy for many. Why? It’s Tax Day, of course. If you’ve ever wondered why the world of business gets just a little more on edge around mid-April, it could well be something to do with having to file federal taxes. This feeling of nervousness is especially pronounced in the small business community, and in particular for start-ups and one-man-band entrepreneurs.
When you start a business, the first few years are especially tough not just because it’s hard getting off the ground financially, but because you have to fulfil many roles yourself. You’re the HR rep, accountant, director of administration and all the rest that comes on top of providing whatever product or service your company is offering. Throwing the convoluted and frankly intimidating US federal tax code on top of all that is all the more stressful ---
How do you manage company cars and mileage? How do I manage my employees? Do I use W9? 1099? W2? How do I manage salaries? Can I use my personal money to pay for business needs?
In today’s article, we’ll be exploring the world of taxation for small businesses. Below you’ll find five broad tips that should be helpful for those wondering about common areas of concern when it comes to taxes.
Tip 1: Open a separate business bank account
When it comes to business income and expenses, it benefits you hugely to have everything separated from your personal money. A separate account means you can track your business expenses more easily. If you run everything through one account, you’ll have to go through your statements with a fine-tooth comb, separating out all the business and personal expenses. That’s time you could spend producing.
Tip 2: Manage your work vehicle(s) with care
Work vehicles bring tax deductions to your company, but it’s not all as simple as you might think. Come Tax Day you can make a choice to either claim on the vehicle mileage (best for small businesses) or maintenance, insurance, gas and related costs. Claiming on the mileage works out best for small companies, but you have to be sure only to claim for mileage that was explicitly and exclusively for business purposes. A trip to Wal-Mart does not count. You can now use various apps on your phone to precisely record and report on your weekly, monthly and annual mileage. This helps to form a body of proof that you need to prepare and keep ready in the event of auditing.
Any discovery by the IRS of even accidental misreporting of abuse of the system will result in additional taxes and a lovely fat fine on top of it all to further dent your fragile start-up finances.
Tip 3: Know what is tax deductible and what isn’t
You make tax deductions to reduce your overall tax burdens. That’s a concept many are familiar with, but it’s still tricky if you don’t know what’s deductible and what isn’t. Some of the items in our list may surprise you:
Advertising – YES, you can deduct the costs of business advertising, including social media advertising
Buying a company vehicle – NO, the cost of your company vehicle is NOT covered.
Company vehicle loan interest and depreciation – YES, these are valid deductions
Business vehicle mileage – YES (but not if you deduct maintenance/gas/insurance etc.)
Business vehicle maintenance/gas/insurance – YES (but not if you deduct mileage)
Rent and utilities for business premises – YES
Rent for personal accommodation – NO – but YES for any dedicated workspace within that accommodation (must meet federal guidelines)
Computer for business use – YES
Travel for business – YES
Personal vacation costs – NO
Depending on how you’re working, the above can be mixed. Take the computer, for instance. You can only claim on business use. If you have a dual-use computer, then you can only partially claim based on amount of time used for business vs. personal. It gets pretty involved.
Tip 4: Arm yourself for Tax Day and potential audit
When it comes down to it, it’s all about being ready. Keep business account bank statements, relevant receipts, download and store all data relating to mileage on your company vehicles --- the list goes on. Keep a full record of all your business activities and when it comes to Tax Day you won’t have any problems. Furthermore, if you are randomly selected for auditing you won’t have anything to fear. If you don’t do things by the book and you get red flagged by one of the many inspectors, or even chosen randomly for auditing, then you could end up in serious trouble. It’s just not worth trying to fiddle the system.
Tip 5: Having an EIN or LLC doesn’t take away your liability
Some entrepreneurs will apply for an Employer Identification Number (EIN), or operate the company as a Limited Liability Company (LLC) mistakenly believing that it helps to relieve some of their personal responsibility if and when things go wrong. Always remember that if things go pear-shaped at some point, you are ultimately responsible, and you will have to manage the fallout.
The chief message I’d like to send when it comes to taxes is not to be greedy or take risks with your filing. Taxes are no joke, and you shouldn’t take them lightly. If you keep clear records, claim deductions according to the rules and keep your personal and business finances separate, you’re sure to be in a good position. Auditing can happen any time and for a number of reasons (even just a random choice), so be ready, and play it by the book, or you may find that the book decides to play you.
Listen to our Podcast below