5 Easy Tips for Making Tax Season a Breeze!
It's that time of year. Two months before we launch into 2017 and you're wondering how you're going to get ready for tax season in time. Give these five tips a try!
1. KEEP GOOD RECORDS One of the most important steps in starting a business is to establish a solid recordkeeping policy. Not only is good record keeping required in order to prove items of income and expense reported on your business’ tax return, but they also are crucial for monitoring the progress of your business.
Quality records can show whether your business is improving, which items are selling, or what changes you need to make. With any business, quality records can increase the likelihood of business success.
2. DEDUCTIBLE START UP COSTS With most new businesses the old saying “you gotta spend money, to make money” will apply, and how expenses you incur before bringing in revenue is treated depends upon the type of expense.
Currently, the IRS allows businesses to deduct up to $5,000 of certain start-up expenses in the year the business begins (subject to limitations), even if the expenses were incurred in a prior year.
Expenses that qualify are those that would be deductible if they were paid after the business actually began.
Amounts paid to acquire capital and intangible assets, such as equipment or franchise fees that a business would have to depreciate over a period of years, do not qualify for this deduction.
If your eligible start-up costs exceed the amount allowed for deduction, you will have to “capitalize” the excess expenses and will recover those costs via an amortization deduction ratable over a period of 15 years.
In addition to eligible start-up costs, corporations and partnerships are allowed to deduct up to $5,000 of organizational costs in their first year of activity. These include legal fees, filing fees, and other costs directly related to the formation of partnership or corporation business entity.
3. DID YOU PAY ESTIMATED TAXES? A major misstep many new business owners make when starting out is failing to plan well for their end-of-year tax bill. This is especially a problem for individuals leaving work as an employee where their income tax was withheld by their employer.
In order to avoid making this mistake a small business should pay estimated taxes to the IRS if it expects to owe taxes of $1,000 or more for the year ($500 if you operate as a corporation). Not only will paying estimated taxes help you avoid IRS penalties, they will prevent (at least some of) the sticker-shock when you file your tax return.
4. ARE YOU A MLM COMPANY? One major tax pitfall direct sellers encounter has to do with sample and demonstration products. If you keep some of a company’s products on hand in order to show them to potential customers, those costs may be deducted. However, if you expect to sell the demonstrator kits or products rather than exhaust its value, they should be counted as inventory. In either situation, if the products are used for personal reasons, its cost is not deductible, even if you occasionally show it to prospective customers.
5. KEEP BUSINESS AND PERSONAL SEPARATE. The IRS scrutinizes personal expenses that may have been claimed as a business expense, such as the use of a business vehicle for personal use. Be diligent about keeping good records. Maintain a separate bank and credit card account for your business.
This post was made possible by resources from HR Block Small Business Block Talk.