If you’ve decided to start your own business, congratulations! It can be a daunting process, but it can also be tremendously profitable if done right. Here are a few tips to help you get started on the right foot.
It’s a Business, Not a Pastime – Losses that are injured from one of your hobbies are not tax deductible. Therefore, it’s important that the IRS views your business as having the ability to earn a profit. In order to showcase this, construct a business plan and document your marketing and management efforts. In truth, the best way to demonstrate this is to actually make a profit. The IRS presumes that your activity is a business if it makes a profit during at least three of the past five tax years (at least two of the past seven years if the business is horse related).
Keep Track of Income and Expenses – You’re required to keep track of your income and your expenses so that you can accurately list them for the IRS on your annual tax returns. This means keeping written accounts of car mileage, business dinners, computer use, daily appointments, and anything else that might help you verify the legitimacy of your tax deductions.
List Income as It Comes In – Most owners of small businesses with receipts of less than $1 million per year will find it worthwhile to make reports using the cash method. This means income is reported as it is received rather than when it is billed. Expenses are reported as they are paid. Using this method gives you greater flexibility to save on taxes by moving income and expenses between years.
Deduct for Home Offices – If part of your home is used to perform duties relating to your business, you may be able to claim it as a home office deduction for a portion of your expense related to utilities, rent or mortgage interest, cleaning and so forth. You can utilize this deduction even if you provide services at other locations.
Choose Wisely When Forming a Business Entity – A large number of small businesses are unincorporated. However, if you want the benefit of a more formal structure, including limited liability, consider organizing your businesses as an S-Corps or LLC taxed as a partnership. Losses of these entities flow through to the shareholders. This is especially useful in the first year of business when losses are often high to reduce overall taxes. Later, when profits are high, you might then convert to a C-Corporation to take advantage of the corporate tax rates and employee benefit plans that are available through this structure.
Navigating the tax code and all the rules and regulations that come with it can be daunting for a new business owner. We can help. Our team of certified public accountants (CPA) are exerts in tax preparation and other tax services. Contact our offices in Joplin, MO and let us know how we can serve you.