As a co-owner of a small business, I know how important it is to structure out operations. We focus on every aspect of building a strong business, and part of this involves taking careful considerations for our taxes. It’s important for all small businesses to manage their accounting as best they can, and in turn, create write-offs to help reduce the income tax you need to pay quarterly.
Here are a few essential small business tax tips that we found out first hand, based on two years of running our own business.
Receipts This is the most important thing to your overall tax preparation. Scan all business receipts, store them onto a computer and then reprint them, since most carbon receipts will fade with time. If you do not have the time to scan or reprint them, just use a pen and re-write the date, place, what you purchased and purpose of the purchase on the receipt itself (only do this if it is a last resort or if you are on the road). If you do not have proof of your business costs and the IRS knocks on your door, well… just make sure you have other proof (check card statements, credit receipts) if you don’t have your receipts.
Car or Other Vehicle Expenses Most businesses have a company vehicle and when calculating the taxes, use either an Actual Expense Method or the Standard Mileage Deduction. In the long run, they normally come out to be about the same. With the Actual Expense Method it allows the taxpayer to write off the depreciation and out of pocket cost, if they own the vehicle. Just take note that if you choose this way you need to keep great records and what is personal and is for business.
The business percentage is what you need to use for your tax write offs. The expenses that you can write off will included, vehicle repairs (tires, breaks, ext.), vehicle essentials (gas, oil, ext.), vehicle fees and garage rent. You do not calculate miles or use any sort of traffic tickets, which you might have for the year, and a reduction will need to be done for what is calculated as personal use.
With Standard Mileage Deduction, you will then keep records of business mileage at the IRS rate of $.555/mile (rate is for 2011). You need to keep mileage logs that will need to include the date, destination, purpose, odometer Start/Stop and the total number of miles (Round Trip). If you had to spend anything for parking or a toll, record that as well, and try to get a receipt if possible. Personally, I use the Standard Mileage Deduction because I know how to repair my own vehicles and this is a great way to reduce even more of your income tax.
Travel Expenses The major thing that I did not realize for this is that if you receive frequent flier miles to purchase a ticket(s), the airfare cannot be deducted when this is done. Now, if you do not use frequent flier miles your airfare will be deductible and so will be everything else on your trip. Just make sure everything has a reasonable purpose and cost. You can even include your travel tips for food or drinks.
Business Gifts It is only a small amount, but it adds up. You can deduct up to $25 a year, per person, for gifts. Don’t get gifts mixed up with entertainment, because you will subject yourself to the 50% rule. For example if you mark a $25 gift as entertainment, you will receive a deduction to $12.50. Make sure you save the receipt and list the purpose of the gift.
Repairs Repairing business equipment or property is considered a deductible. Be cautious when determining what is considered a repair and what is a capital item. For example, our printer tray needed to be replaced, and this is a business equipment repair. Replacing the entire printer would be a capital item, and would be subjected to a yearly depreciation value. Generally equipment priced over $100 is considered a capital item.
Rent Many rent owners make payments, January to December. These expenses are deductible as long as your business is being run out of it. When a business uses accrual accounting, then it needs to be considered a capitalized expense. On a cash basis, then it will become deductible for the current year. You are able to write off most utilities used as operating costs.
Subcontractors When operating a small business through its first years, there are always the busy times when you cannot keep up and need to hire out help. Keep good records of any subcontracting expenses because you can write this entirely off your bottom line.
Advertising These deductibles included any expense that includes business cards to event fees. You can even deduct billboard rental fees and any advertising campaigns that may arise.
Sponsoring Charity Events All charitable sponsors can be written off and most of the time you just need actual invoice, detailed report of what was done, date, and for whom, along with a written thank you statement from the charity.
Medical Expenses You can write off 90% of all medical expenses as long as they are not over-the-counter drugs. This section of our taxes is going under a change for 2012-13, but we will keep a heads up regarding this on our blog.
Small Expenses – These Will Add Up Subscriptions and dues are deductible as long as they are for business. The only ones that are not are hotel, athletic, airline and sporting membership costs, even though they are considered business-oriented (hotel and airline is categorized in a separate section dedicated for travel expense).
Professional and legal Fees as long as they are legal, included tax or accounting services and appraisal fees are all deducible. Merchant and bank Fees include all bank related fees or costs. This includes PayPal costs and ATM service fees. General office expenses, including all offices supplies, cleaning services, plants, postage, uniforms, phone bills are all deductible.
Hope this helps It took us a little while to get into the rhythmic fashion of running our business, and we hope that this will help you in your own quest to grow. If you have anything else that we can add, feel free to leave us a comment and we will modify the post with a recognition of your addition.