Starting a small business can be risky yet rewarding! As an entrepreneur, I understand that any advice on becoming successful helps you start off on the right foot. So to help with this endeavor here is small business tax advice you need to know before venturing out to start your business.
Make the Transition from a Hobby to a Business
As I have already stated, going into business for yourself can be extremely rewarding, however, the longer you wait to transition your hobby to a business, the harder it will be to deduct business-related expenses. Take that leap and write out a business plan to document marketing and management efforts.
Note: The IRS presumes you operate as a business if you make a profit during at least three of the past five tax years.
Carefully Select Your Business Entity
Just because you start a business doesn’t mean you need to rush and incorporate it. Filing as a corporation can be much more costly than operating as a self-employed individual. Having your business incorporated means you will be subject to several additional costs such as worker’s comp, employee wages, payroll taxes on your income, as well as unemployment and state taxes if you decide to hire on help.
Note: Tax deductions for businesses are essentially the same for corporations and self-employed individuals, so filing as self-employed does have its perks!
Keep Record of Income & Expenses
Business owners are required to track and keep a record of their income and expenses to report them to the IRS when filing your annual tax return. In the midst of your daily routine be sure to keep track of mileage, cost of supplies needed to run your business, business-related trips and appointments so you can substantiate any tax deductions you decide to take during tax filing.
Report Your Income
Many small business owners that have annual gross receipts less than $1 million tend to report on the cash method of accounting. This is when income is reported as it is received instead of when it billed. Expenses are reported as paid and the method allows you to have greater flexibility to save taxes.
Make Your Home Office a Tax Deduction
Do you work from home with an office space dedicated to running your business? If so, then you can count that as a deduction as long as the home office meets IRS requirements.
Before taking this deduction, you have to be realistic. Placing your laptop on a table or laying on the couch working won’t cut it. However, an entire room does not have to be devoted to your home office; part of the room will work.
Enjoy summer and all of the great perks that come with the season! Take advantage of these tips to grow your small business and reach success.
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