6 Fundamental Tax Tips for Entrepreneurs
I had lunch with a fellow financial writer the other day. Naturally, the topic turned to taxes. "I almost went out and bought a couple of iPads recently," my friend told me. "It's the end of the year, and I thought it'd be a good way to get a write-off."
"Why didn't you?" I asked.
"I realized it was a dumb thing to do," she said. "It's a mistake to make business decisions based solely on taxes."
My friend is right. But entrepreneurs who may be shrewd about other financial matters often make mistakes when it comes to their taxes. According to Mike Piper, a CPA who writes about investing at ObliviousInvestor.com, the errors are basic and easy to avoid. "The most common stuff is really mundane," he says. Follow these simple rules to maximize your money--while staying on the IRS's good side.
Don't go it alone.
We entrepreneurs are do-it-yourselfers. We take pride in our ability to micromanage every aspect of our business. But taxes are one area where you should definitely seek professional help.
Case in point: Chris Guillebeau, author of The $100 Startup. "When it comes to taxes, I've always been honest, but I haven't always been organized," he says. "For several years I did my own returns--not a great idea, since I overpaid by failing to take advantage of available deductions. Turning things over to a CPA helped save me money."
Pay estimated quarterly taxes.
"Many first-time business owners forget to make quarterly estimated tax payments the first time they have self-employment income," Piper says. "They're used to having taxes withheld from their paychecks." I know this may seem obvious, but it happens.
Work with your accountant to figure out how much you need to pay each quarter. And don't forget to factor in any state, county or city taxes you may owe.
Don't mingle business and personal expenses.
First-time business owners are notorious for doing this. And at the end of the year, their accountant has to sort though it all, which significantly jacks up the cost for tax preparation. Fortunately, it's a mistake that most business owners make only once. The easiest way to avoid this mess: Set up separate checking and credit card accounts for your business.
Look beyond the classic IRA.
For years I contributed to a personal Roth IRA, with its limited contribution amount, and yearned to have a 401(k) like my wife's. Then I discovered the individual 401(k). Annual contribution limits are much higher than with an IRA--$17,500 in 2013 ($23,000 if you're 50 or older)--and you can make Roth 401(k) contributions with after-tax income. Contact your investment advisor for more information.
Form the right type of corporation.
Many entrepreneurs would benefit from forming an S Corporation or choosing S Corp taxation rules for their LLCs. For an S Corp, you set up a regular payroll and make monthly payments to the IRS, with significant tax advantages. "With an S Corp, you'll technically become an employee of the LLC," Piper says, "and that salary will be subject to payroll taxes. But any company profits are subject only to income tax." Depending on how much you pay yourself, you could save thousands each year.
Shut up and do it.
You don't have to like taxes, but you do have to pay them. If you can't pay Uncle Sam the full amount owed, file your return anyway (it's the law), and pay as much as you can, as soon as you can. Then complete Form 9465 to set up a payment plan for the rest.