Taxes, Taxes, Taxes... Eek!

I know there are many business owners and entrepreneurs (especially those starting out) that are mystified about how to deal with taxes now that they aren't on a standard W-2.  Here are a few tips to start out a new business owner on the right track:

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1. Track All Expenditures, Expenses, and Income

• KEEP YOUR RECEIPTS! - this is by far tip number 1.  The easiest way to track your expenses and to keep all of your receipts and even write on them who you were with and what you are doing.  While your accountant might not to see your catalogued receipts to complete your taxes (especially if you charge all business expenses to one account).  However, if the IRS ever wants to come in for an audit, you will be grateful to hand them the pile of receipts you were tracking for that year.
• While we are talking about saving receipts, it's a good policy to save all tax documents for at least 7 years!  And copies of business tax returns, licenses, incorporation papers and capital equipment expenses should be kept indefinitely.

2. Writing it Off: Deductions

• Businesses can deduct all "ordinary and necessary" business expenses from their revenues and reduce their taxable income.  Remember that in addition to the obvious categories, business losses, and trips that combine business and pleasure can be deducted (to the extent the trip was for business).

3. Quarterly Estimated Taxes

• A rule of thumb is that a business must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
• By the end of the year either 90% of the tax that is owed or 100% of last year's tax must be paid.  Businesses can subtract their expenses from the income each quarter and apply their income tax rate (and any self-employment tax rate) in the resulting figure (this is their quarterly profit)

4. Important Tax Deadlines for Businesses

• Annual Returns - Most returns are due April 15 for unincorporated company and S-Corporations.  C-Corporations must file annual corporate returns within two-and-a half years after the close of their fiscal year.
• Estimated Taxes - Due quarterly: April 15, June 15, September 15, and January 15.
• Sales Taxes - Sales taxes are due quarterly or monthly depending on your state (California Sales Tax is due monthly)
• Employee Taxes - Employee taxes may be due quarterly, monthly, or weekly depending on the size of your payroll.

5. Charitable Contributions

• Tax benefits generally "flow through" businesses other than Co-Corps, and can be claimed as deductions on the individual tax returns for the shareholders of the company.  To get the most of your tax benefits, follow these rules:
  • Only contribute to charities listed as qualified organizations by the IRS (Consult IRS Publication 78)
  • Contributions of more than $250 require a letter from the qualified organization, for less than $250 a cancelled check will suffice.
  • Donations of property can be donated at FMV as long as it has not already been written off as a depreciated asset.
  • You typically cannot deduct pledged contributions.  Deduct in the year the tax is actually paid.

6. Know What You Can Deduct (and cannot deduct)

• Home Office - A home office has to be a distinct space for your office that you don't use for anything else.  How you can deduct the percentage of home expenses that is deductible for your business is simple. Measure your work area and divide by the square footage of your home. That percentage is the fraction of rent, mortgage, utilities, taxes, and maintenance you can claim.
  • ​​Pro Tip: Many accountants recommend deducting a maximum of 1/7 of your home/apartment space for the office to avoid an audit.

• Technology Expenses - Technology expenses are covered under Section 179 of the tax code.  They can be taken during the year they are purchased, but can also split it between several years.  When you're thinking about a new technology purchase, don't let the tax hold you back, but do make sure it is for your company and something that is actually a good expense for your business.  Here is a list of a few technology deductions:
  • Computers
  • Printers
  • Company Vehicles (to a certain amount... check with a professional accountant here)
  • Business-related software
  • Subscriptions to business related besides and magazines
  • Conference deductions (again, you want to check with a professional accountant here)
    • Must be directly related to your business or industry

• Travel Costs - many travel costs are completely tax deductible (including those necessary for business success and expansion).  Keep in mind that costs for your family and for pure entertainment, are not deductible.  So make sure you keep those costs separate even if the family comes along for some of the non-business fun of your travel.
  • Airfare
  • Hotel Fees
  • Car rental and milage
  • Laundry costs
  • Food (but only up to 50%) 

7. If You Are Really Uncomfortable, Get an Accountant

• Having a good accountant can save you a lot of time and money, especially if you aren't sure what you are doing.  They can help you come up with a plan for the year that will keep your company on track with taxes.  While accountants sound expensive, they can often be very affordable.  If you're in LA, I have suggestions, and if you are in other cities, ask around to find someone that is recommended by those you know.

8. The IRS Can Help (no, really, they can)

• The IRS small business website provides information to small and growing businesses.  There is a section for business getting off the group that includes a checklist for taxes.  It has helpful information on employee taxes and business tax deductions 

Full disclosure - I keep records throughout the year, but I use an accountant to file my taxes to make sure I'm doing everything correctly.  Nothing dampens your day as much as finding out you are going to have an IRS audit.

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