Taxes are a very important topic to talk about with new entrepreneurs because taxes play a huge role in the success of a small business. Taxes can be beneficial for both an entrepreneur and the government, but if they’re not done correctly it can have negative consequences.
If you start a business as a sole proprietorship or partnership, your business is required to file an annual income tax return.
Additionally, you’ll also want to make sure you’re paying quarterly estimated taxes to avoid a penalty.
Here are the things new entrepreneurs need to know about taxes.
Understand the tax laws
When you start a business, it is to your advantage to make sure you understand all of the tax rules and laws that apply to your situation.
This includes understanding how to maintain good records for your business and what types of expenses qualify as deductible.
For help understanding the tax laws, you can check IRS.gov.
Keep records of all expenses incurred
Along with making sure you understand the tax laws there are several record-keeping requirements that need to be in place in order for you to legally deduct your expenses. You should keep a log of any and all business-related expenses, even if it is a very small amount. This will make tax time less stressful because you can go back and find proof of specific transactions from the previous year.
To keep track of your business transactions, it is recommended to use accounting software or an Excel spreadsheet.
Make sure you’re deducting every possible expense
There are several different types of deductions that people tend to forget about. You can deduct a range of items from travel expenses to office furniture. To make sure you’re taking advantage of all possible deductions, talk to your accountant before the end of the year. Costs for tax advice and filing fees are deductible as well.
Common tax deductions for entrepreneurs include:
- Travel Expenses (Ex. Gas mileage for meeting with clients, plane tickets)
- Insurance (Ex. Renters insurance, health insurance premiums associated with business use)
- Home Office (Ex. Part of the house used exclusively for business activities)
- Office Supplies (Ex. Pens, paperclips)
- Dues and Subscriptions (Ex. Taxi, gym membership)
- Entertainment Expenses (Ex. Client dinners)
Establish a good relationship with your accountant early on to avoid any problems down the line
If you end up facing an audit, it is best to be prepared and have everything in order. If you hire an accountant – and even if not – it’s important that you talk to someone about your business taxes and what records and receipts they need from you. This will make it easier for you if you are faced with an audit of your business. It is advisable to always hire a reputable tax service professional to be on the safer side.
Be prepared for audits
Audits are inevitable, but there are ways to lessen the blow if it happens to you
Being prepared for an audit is important because they do happen. In fact, if you’re self-employed and file a Schedule C with your Form 1040, it’s almost guaranteed that you’ll be audited at least once during your business career. If
Determine if sales taxes apply to your business
When you start a business, it is important to determine which of the two types of taxation rules applies to your situation: gross receipts or flat tax rates. If you choose the flat tax rate method, you will pay the same tax rate on all of your business’ income. Sales taxes are applied to all taxable items bought or sold in a state, but only if the item is sold from a place of business.
If you’re unsure if sales taxes apply to your business consider consulting with an expert to get sales tax help.
Taxes can be beneficial and rewarding if they’re done correctly, but unhealthy and risky if not taken care of properly. If you start a new business, it is best to be prepared for all possible tax deductions and laws that apply to your situation in order to avoid any problems.