3 Ways to Save Money on Taxes That Most Entrepreneurs Miss
Utilize these strategies to save your wallet when tax time comes around.
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There is one time a year that requires a detailed level of attention for a business owner, no matter the size of your business.
When tax season comes around, entrepreneurs initiate survival mode sometime between January and April 15 and look for every way to get a few more deductions.
Bookkeeping, tax filing, audits and deductions will assist in keeping a good relationship with the IRS, as well as supporting good habits for your business; however, because getting everything just right can be overwhelming, it is easy to miss important things and leave money on the table that would be better suited in your pocket.
Tax season reaches beyond the immediate tax return and can have a lasting impact five or even 10 years down the road. While you can make certain deductions one year that will benefit you, as your business grows, having a different strategy is in your best interest.
This requires experience, a little patience and a willingness to learn from the mistakes you made.
There are three very important things every business owner should be paying attention to when you file your yearly taxes to ensure you are getting the most out of your return. These examples can also create strong business habits that will help you create a long-term operation.
Related: 75 Items You May Be Able to Deduct from Your Taxes
The home office deduction
While it may be more convenient to work from home, as well as being fiscally cheaper, it may make you a target for audits.
Since you can deduct items like the square footage of your home office or short trips to the office supply store, it is crucial that you have the documentation to verify everything you list as a deduction.
With less obvious options like the Augusta Rule — in which you can rent your home out to business events and summit meetings — you have more options for write-offs and every purchase adds up. Nearly every purchase that you make for your business is considered tax-deductible as it relates to your business.
Although not every person who works from home will be audited, if you were to go through a formal audit and you do not have proper documentation for your deduction claims, you can have those deductions revoked.
If your business is growing quickly and producing high capital, you may want to consider moving your business into an office lease to keep your home and business separate.
This will be to your advantage when you are looking for clear defining factors in listing deductions, but if that's not your cup of tea as an entrepreneur and you like the home office as a center for operations, make sure you keep proper documentation of your home office to ensure your write-off isn't arguable in the case of an audit.
Related: These 6 Tax Tips Will Help Make Tax Season Easy for Your Business
Utilize deductions in the ways that benefit you the most
Being honest with your deductions is a good practice to have, making sure that you are not putting forth false information to save a few bucks.
One thing that many people do not consider is overusing deductions that are available. It can be quite easy to get into a rhythm of using the same tactics every year, but this can cost you in the long run.
Let's say you were to buy a new vehicle every year or two for your business. It could be a worthwhile plan for the first couple of filings that will help ease some of the financial pressure on a young business.
However, this can turn into abuse — not from a legal standpoint, but in the metric that vehicles depreciating over time will cost you more than the deduction would save.
Working with a professional accountant to have a good roadmap to how your deductions will affect you not only this year, but in future filings, is a good thing to consider. This will help with the guidance of what you should be used as a deduction and what would be better to leave behind.
Map your deductions out accordingly because they can save you a lot of headaches and money 10 years from now.
Related: The IRS Hates Telling Entrepreneurs Anything About Taxes. Here's How You Can Find Out What They're Thinking.
Categorize your business properly
It is a necessary task to "list" your business regardless of where you operate. That being said, there are four options upfront as to how you list your business by definition and how your business is classified can save you or cost you money.
The four business classifications are:
LLC: A limited liability company.
S corp: S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
C corp: A C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.
Sole proprietor: A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
With all of these options, it is imperative to either know what you are doing or work with someone who does to register your business accordingly in the state you own a business.
Related: 14 Tax Deductions Your Small Business Might Be Overlooking
It can be misleading as to which definition will be the best to suit your needs; however, if you do it correctly, it can create a good foundation that will benefit you.
There can be many options to choose from when you are looking for deductions within your business, whether you are working from home or in an office space, under an LLC, sole proprietor or S corp. If you are unfamiliar with how to navigate this information, it is best to hire an accountant/bookkeeper to help guide you through.
While there are many "deductions" you can apply to your business, being aware of the things that will benefit you now and in the long run can relieve stress when you need it most.
Utilize every deduction you can to bring the cost of running your business down like materials, office supplies, office space, vehicles, advertising, etc., then consider what you will still be able to use in the big picture by measuring your growth against what you are saving this year.
Documentation is one of the most important things you can do, so if you don't have the time to be on top of it, hire a competent bookkeeper.