10 Tax Hacks for Entrepreneurs Starting Their Own Business
When you become an entrepreneur and start your own business, there’s a lot on your plate. You’ll be making countless important decisions and juggling many new ideas, plans, and collaborators. Because there’s so much to do, one important aspect of running a business often gets neglected: thinking about your taxes all year long.
Thinking about your taxes throughout the year may not seem like a crucial part of running your business, but it is. When you file your tax return for your business, there are many deductions and credits you can take advantage of. But if you don’t know about them or don’t keep proper records throughout the year, you won’t be able to claim them and could miss out on incredibly valuable savings at tax time.
However, with the right knowledge and planning, you can make sure you’re able to maximize your tax return and pay the IRS as little as legally possible. To ensure you have the knowledge you need, we’re filling you in on the top 10 tax hacks for entrepreneurs starting their own business.
- 1. Keep Receipts and Detailed Records
- 2. Utilize the Home Office Deduction
- 3. Deduct Travel Expenses
- 4. Deduct Auto Expenses
- 5. Deduct Health Care Costs
- 6. Deduct Business and Professional Fees
- 7. Deduct Phone Calls
- 8. Categorize Workers Correctly
- 9. Deduct Software and Subscriptions
- 10. Put Tax Deadlines on Your Calendar
1. Keep Receipts and Detailed Records
When we asked the California-based tax relief company Tax Defense Partners the top mistake businesses make when doing their taxes, poor record keeping was at the top of their list.
Keeping organized records, which includes saving all business-related receipts, is incredibly important for three reasons. One, keeping your records organized throughout the year allows you to not waste time organizing paper or electronic records all at once, which takes longer and leads to more mistakes. Two, keeping your records organized throughout the year allows you to get a better picture of your current financial strategy and see if you need to adjust your business plan. And three, having organized, comprehensive records is crucial should you ever be audited, as you’ll need receipts and records to prove your return was filed correctly.
Many of the other hacks on this list involve valuable deductions you can make as a business owner. But knowing about these deductions doesn’t mean much if you can’t prove to the IRS that you can take them, so always keep your receipts and organize them as you go.
2. Utilize the Home Office Deduction
Many entrepreneurs start their business out of their home. And if you have a home office, you can deduct expenses from it on your tax return, including expenses like internet services, office supplies, and rent. Being able to deduct rent can be a very valuable in tax savings come tax season. However, know that you can only deduct a portion of your rent (the percentage that covers your office space’s square footage) and that your office space must be a dedicated office space.
If you’re currently working from home, but are using a living space as your office space, it may be worth it to convert part of your home to a dedicated office space in order to qualify to claim the home office deduction.
3. Deduct Travel Expenses
Many people overlook certain travel expenses when making their itemized deductions. To maximize your deductions, know that for business trips you can claim all related hotel stays, travel costs (such as flight tickets), and 50% of all meals you eat out (no clients need to be present).
4. Deduct Auto Expenses
If you use your car for business or own a company car, some costs of using and maintaining your car are deductible. This includes car maintenance, gas costs, and mileage. If you’re claiming mileage, however, be sure to keep track of the exact amount of miles you drive that are related to your business. Note these in an accounting system and make a note of the purpose of each trip. It’s very important to keep detailed records of mileage and not just guess, as the IRS often looks closely at this type of expense.
5. Deduct Health Care Costs
Many self-employed taxpayers and small business owners don’t realize that they can deduct health care costs at tax time, including the cost of health care plan premiums. Under proprietorships, 100% of health care costs are deductible on Form 1040 as an adjustment to income. Under C-Corporation rules, health care cost are deductible under a health reimbursement arrangement, which you would need to have set up if you do not already have one in place.
6. Deduct Business and Professional Fees
A number of business expenses and professional fees can be deducted if you’re a small business owner. This includes paying fees to lawyers, paying fees to accountants or tax preparers, and the costs of buying business books. Additionally, commonly overlooked modern business costs that can be deducted are those for digital marketing services, such as fees paid to outside social media consultants.
7. Deduct Phone Calls
Talking on the phone is a vital part of running a successful business and, because of this, all phone calls that are related to your business are deductible, even if you make them on a non-business phone such as your cell phone. However, these deductions are looked at closely by the IRS, so be sure to keep good records of which of your calls were business calls if you are using a personal phone (you’ll need to deduct only the portion of your bill that’s related to business calls). If you have a dedicated business phone that is used primarily for your business, all regular expenses associated with this phone are deductible.
8. Categorize Workers Correctly
Commonly, small business owners hire freelancer employees as to help grow their business, which can be an excellent option. However, it’s also common for small business owners to incorrectly classify employees as independent contractors, which can cause a lot of trouble with the IRS. If you’re not sure whether your workers are independent contractors or employees, do some research about the difference between the two (the American government and the IRS have clear rules about this) to make sure you categorize them correctly.
You should always do personal research on your unique situation but know that the IRS looks at three things to consider whether a worker should be classified as an independent contractor or an employee (whether they’d be considered a part-time employee or a full-time employee, the IRS looks evaluates the same aspects of their employment). These three things are whether the company controls what the worker does and how they do their job, whether the business aspects of the worker’s job are controlled by the payer, and the type of relationship in place, which includes considering written contracts, employee-type benefits, if the relationship will continue, and if the work performed is a key aspect of the business.
Also, it should go without saying that you should avoid the temptation to pay people “under the table.” This can seem like an easy option but it could both get you in trouble with the IRS and cause you to miss out on valuable tax saving deductions.
9. Deduct Software and Subscriptions
Another commonly missed deduction is software and subscriptions. If you have bought software or subscriptions that are related to your business (for example, editing software for an editor or fashion magazine subscriptions for a fashion designer), these can be deducted. A wide variety of software tech and subscriptions can potentially qualify for a deduction if it applies to your business so, if you’re unsure if you can deduct something, keep records of all the software you buy and everything you subscribed to. Then, come tax season, your tax preparer can evaluate what can be deducted.
10. Put Tax Deadlines on Your Calendar
When you’re a business owner, you’re very busy. But to make sure you never miss any tax deadlines, even with your busy schedule, put tax deadlines on your business calendar. If you aren’t sure of the tax deadlines you should be mindful of with your unique business model, the IRS website has a calendar for businesses that can help you stay on top of deadlines.