Must you be a small business tax expert in order to run a successful home business? No. However, to make life easier both in the long and short-run, here are a few home business tax tips to help any owner navigate tax time like a pro:
1. DO Stay Organized:
Keeping your business in order is going to make your life a whole lot less stressful come tax time. It may even save you money because you’ll be able to easily identify all your business expenses, helping maximize on year-end deductions. Running a home-based business can be exhausting enough, the last thing an owner needs is to lose sleep over how haphazardly the books are being run. Set aside business time each day devoted to logging business activities. If you don't have time, consider hiring a virtual assistant or bookkeeper to help you keep things straight.
2. DO Keep Receipts:
There are always a lot of questions around whether or not you can use credit card statements in lieu of an actual receipt. I am here to tell you that you just want to keep the receipt. If audited, you will have to defend every deduction and the best way to do this is with a receipt and a few written notes offering details about the purchase and why it was relevant to your business. If you take a customer to lunch, write down who was at the lunch and then stash the receipt in a "to be recorded" pile. Review and organize your receipt pile daily or weekly, whichever best suits your home business needs. Just think of a potential IRS audit like you are guilty until proven innocent. You want to overdo the record keeping, not live on a wish and a prayer if that audit time comes.
3. DON'T Commingle:
Where possible, set-up a separate bank account for your business and run all your business purchases separate from your personal account. Not only can this be a tidier way to run a business, it is the recommendation of the IRS and will help make staying organized easier too.
4. DO Buy That New Computer:
Oh yes, all business-related office equipment, software and furniture is 100% deductible within the year you purchase it. What a great way to continue to keep updated with the tools you need to perform at optimum levels. Just be aware that you will have to defend all business purchases if audited -- so the new 50” 3D flat screen could be a tough sell to Uncle Sam.
5. DO Go to the Conference in Florida:
All business related travel is 100% deductible. Now you don’t need to feel guilty about taking that course or attending a trade conference (especially if it is in a location that involves a beach). Just remember to keep all the receipts from your trip and review the IRS guidelines on travel deductions.
6. DON'T Push the Envelope
Running a business out of your home has amazing tax benefits, but it also puts you on the IRS audit radar. If you experience more than three consecutive years of losses within the business, the IRS will throw up an audit flag because it can look like you are conducting a “hobby business”. So don’t go nuts with your deductions or delve into that ethical gray area. If you aren’t sure on something, consult a tax expert before you send those taxes in. It is always better to be safe than sorry.
7. DO Set Some Money Aside
When things are all said and done, the ultimate goal within a home business should be to make money. Once you’ve got things figured out and are generating a profit, you will start owing taxes. It is recommended that this estimated tax money is set aside each quarter and paid to the government in installments. It is never a good thing to get to April and realize you owe the government more in taxes than you had planned on.
