Owning your own business can be like a dream come true. You're your own boss, you make the rules, and you get to spend your days doing something that you love. However, a hefty tax bill – or worse, an IRS audit – can turn that dream into a nightmare pretty quickly. Unless you're in the business of doing taxes, you're probably not a tax expert yourself. That's OK, most people aren't. But it's important to know enough to avoid making costly mistakes that could harm the financial health of your business. Take a look at a few tax mistakes that you'll definitely want to avoid when starting your new venture.
Mixing Your Finances
You may be used to only having one bank account to deal with, and when you're just starting out, it may seem like it makes sense to just keep all the money in one place, especially if you have few or no investors and you're mostly funding yourself. However, when tax time rolls around, you'll realize that this is a mistake. Unfortunately, by then it will be too late.
Here's the scoop: your tax obligations as an individual are different than your tax obligations as a business. However, if your finances are intertwined, it can be tough to effectively separate the two when you're filling out your tax forms. It's too easy to end up deducting personal expenses as business expenses, even inadvertently. Not only could that result in you having to pay fines or penalties, that's the kind of mistake that could end with the IRS combing through your books with a fine toothed comb, looking for evidence that you owe them even more money. You don't want that. Do yourself a favor and make sure that your business finances and personal finances are kept completely separate.
Picking The Wrong Structure
The business structure that you choose is important for many reasons. It determines how you can raise money for your company, what kind of liability you have, and what kind of regulations you have to follow. However, it also affects how much you pay in taxes.
For example, if you incorporate as a Corporation, your profits are effectively doubletaxed – your business will pay taxes on them as they are earned, and then you, as a shareholder, will be taxed again when you receive the dividends. You can avoid this scenario by filing as an S Corporation or a Limited Liability Corporation instead. It's important to consider the tax impact before you choose how to set up your business structure.
Failing to Deduct Startup Costs Correctly
It costs money to start a business, and luckily, the IRS understands that. This is why they have rules in place that allow you to deduct some of your startup costs. However, many people either don't realize that they can claim certain expenses as startup costs, or incorrectly assume they can just deduct everything.
In reality, you can deduct expenses even from when you were just considering your business. If you had expenses related to product research or scouting out locations for your business, those are fair game. You can also deduct expenses for things like advertising, employee training, and incorporation. However, the deductions stop as soon as you make your first sale. So employee wages are startup costs when you're paying them to set up your store, but they become regular business expenses as soon as the first cashier rings up the first customer's purchase.
It's also important to note that you can only deduct $5000 in startup expenses during your first year, with the rest to be amortized over the next 15 years. And that's only if you spend $50,000 or less during the startup phase. If you spend over $50,000, you have to deduct the overage from that first year's startup deductions. So if you spent $53,000, you can only deduct $2000 in startup expenses during your first year. If you spent $55,000, you won't be able to deduct any startup expenses during your first year. Keep that in mind when budgeting the cost of your startup.
It's just good business sense to use experts for important matters when you yourself are not an expert in the subject. Find a reputable business tax preparation service to help you ensure that your new business's tax situation is under control. That will free you up to focus on the area that you're an expert in – running the business that you're creating.Share
7 September 2016
When I started thinking about my life, I realized that I was spending a lot more money than I should be every month on little extras. I wanted to streamline things, so I decided to start focusing on getting my finances in order. I started looking around my house, and I was pleased to discover that there were more than a few things I could sell for a little extra cash. I put them online, and I was amazed to see how quickly they sold. After selling some things, I was able to get my finances in order, which was a huge relief. This blog is all about getting your finances in order.