Thousands of small business owners across the United States are currently gearing up to file their taxes. While those who’ve been in business for years already have a system going, others who’ve only recently become small business owners are probably unsure what to do next.
Does this describe your current situation? If so, no worries. The following are several useful tax-filing tips for small business owners to consider:
When it comes to filing your taxes, small business owners have two options. They can either have a tax preparation service do it for them or do it themselves. There are pros and cons for both. Accountants and tax prep services will charge a fee, but small business owners get peace of mind in return. Filing by yourself is free, but there’s always a chance you’re making a mistake. Generally speaking, those with a penchant for math and a knack for deciphering legalese are encouraged to file on their own, while those who lack these skills are better off working with an accountant or tax prep service.
Small business owners are responsible for tracking their income. Failure to do so can lead to discrepancies and additional scrutiny from the Internal Revenue Service. While 1099-MISC forms provide substantial documentation of business income, they are not comprehensive. The only way to ensure you don’t accidentally commit income tax evasion or end up paying more than you owe is to carefully track every dollar your business makes during a given year.
As the saying goes, it takes money to make money. Fortunately for small business owners, most of the cost of doing business is tax-deductible. That means they can subtract certain expenses from the total amount of taxable income. For example, if a baker bought an industrial-grade food mixer for $5000, her taxable business income is reduced by $5000. However, it’s imperative to have records of tax-deductible business expenses. Failure to do so means your deductions won’t stand up to an audit.
One of the most common financial mistakes made by small business owners is mixing business and personal finances. Not only does this make it incredibly difficult to track business income and expenses accurately, but it also allows the IRS to dive into your personal finances. The simple way to avoid these potential headaches is to open a business-only bank account and use a business credit card for purchases
Gross income refers to the money earned before expenses are subtracted. The money left after expenses are accounted for is known as net income. It’s a seemingly simple but critical distinction, leading to frustration and heartbreak if not adequately understood. For example, Hollywood accounting is an underhanded practice utilized by movie studios to trick people into agreeing to a percentage of a film’s net profits then finding ways to claim the movie didn’t make money.
It’s that time of year when small business owners start the process of filing their taxes. Rather than let it cause you stress and worry, look at tax filing as a way to assess the success of your business while also getting square with Uncle Sam. Since paying taxes is as inevitable as death, you might as well get better at doing it.