Kay Bell, author of the Don’tMessWithTaxes blog and a contributing editor for Bankrate.com, says it’s the little things that matter – and that includes dotting i’s, crossing t’s, and documenting everything. It also means making sure you claim every deduction to which you’re entitled.
“You need to make very clear the business purpose and document it via receipts, business logs, ledgers, etc,” says Bell. “Remember, in the tax world you're guilty of trying to avoid taxes until you prove you’re entitled to the tax break. It's up to you to prove your claims are legitimate and accurate.”
Business meals are a big deduction issue – to take or not to take. Bell says yes, but make sure it’s about that next contract, not small talk, and don’t forget that you can only claim half of your business meal costs.
First year advantages
There’s no doubt that the first year of any business can be challenging, but there are also a lot of opportunities to take significant deductions that will help lower your overall business tax bill.
“You can deduct up to $5,000 in start-up costs in your first year in business, although this is limited if you have more than $50,000 in start-up costs,” says Bell. “If you have more than $5,000 in start-up costs, you can amortize them over 15 years.”
Or, explains Bell, you could choose to spread all your start-up costs over 15 years, taking the same deduction each year – instead of deducting $5,000 in your first year. Business owners also get a choice each tax year to either depreciate some equipment – write off the expense over several years (how many years is determined by the type of equipment) – or write it off in the year in which it was bought/put in service. Determine what you need to buy for your business and which method works best for your business taxes.
Invest in the future: Hire your kids – and save for retirement
If you're a sole proprietor, or are in a partnership where you and your spouse are the only partners and you hire your children, you can claim a business tax deduction for the kids’ salaries.
“If it's not too much money, the children may not have to pay any tax on the income,” says Bell. “Plus, there is no Social Security tax when you hire your child who is 17 or younger.”
Saving now helps your future, but it can also help your business. There are lots of small business retirement plan choices, such as SEP IRA, Keogh, SIMPLE, solo(k) and others.
“These can help you save for life after your business and save you money while you're running it,” says Bell. “They have different eligibility requirements and limits, deadlines, etc., so check into the various plans to see which works best for you.”
Hire a pro
Finally, it’s always best to hire a pro for the best tax help and advice. Here’s why. The IRS has had a big push in recent years to regulate tax preparers – including holding them accountable and requiring them to pass competency exams. If you hire a tax pro for your business taxes, Bell recommends you ask about his or her IRS registration status, as well as how they can help you with tax needs for your particular business.
Want more? Visit the blog for more expert insight, as well as the IRS site for small business – there’s a great calendar on the site with important dates specific to small business that is a good resource to keep your business on track.