Think taxes year round - Small Business Owners

To save  money in taxes, have a successful business and/or avoid an IRS agent from knocking at your door, think about taxes year round. This rings especially true for small business owners, business income is taxed at a higher tax rate.  Self- employment income is imposed the self-employment tax of 15.3% and the ordinary income tax rate.

Tax Tips for the Self- Employed

1. Car expenses- If you use your automobile for business , you may be able to write the expenses off.  Use either the actual expense or standard mileage method. Usually, the standard mileage method is more advantageous, depreciation is included in standard mileage rate. For TY 2013, the standard mileage rate is 56.5 cents per mile. If you drive 10,000 business miles , $ 5,650  can be  deducted from your business income, a huge tax savings.

2. Business use of home-   Taxpayers with  a  home office may be able to take the home office tax deduction.Calculate business use percentage by dividing the square footage of your home office by the square footage of your home.  Home expenses are ten multiplied by the business use percentage to figure deductible expenses. Utilities, home repairs, insurance, home mortgage interest,  rent , property taxes qualify for home office tax deductions.
  In order to take the deduction, the area must be exclusively used for business.  If you let an overnight guest sleep in your home office, you are no longer eligible for your tax deduction.

3. Depreciation - Depreciation for office equipment and business asset are tax -deductible expenses. Additionally, taxpayers with a home office can deduct home's depreciation based on the business use percentage.

4. Interest - Taxpayers who borrow money to finance a business may be able to claim a tax deduction for interest paid on the loan.

*Tax Charm blog is not to be used for legal or professional advice.

Small Business Owners Tip - Personal Matters and Business don't mix

Congrats on your new journey as a business owner. The best times are ahead, challenges are also ahead. Start off on the right track by establishing a separate entity for your new venture. A LLC (limited liability company)  is  one option that creates a separate identity for your business.  Setting up a LLC can  protect your personal assets  from seizure  in the case your business is sued.

Establishing a LLC is  one step.  It's still your responsibility  to keep your personal income separate from your business entity and to keep up the tax filings and legal requirements of operating a LLC. One requirement of  a LLC iowner is maintaining a business bank account. The Business bank account should only be used for  Business income and expenditures.

To withdraw money from the business to pay yourself, you can take an owner's draw.

Commingling  business income and personal income will forfeit the protection the LLC provides for If you choose not to incorporate your business, it is still a great practice to differentiate your business income from personal income. The advantages include businesses' profit/losses are easier to compute,   less likelihood of an IRS audit,  and loans approval odds increase.

I recommend all new business owners and those thinking of going in business for themselves to seek help from cpa, lawyer ,and/or professional tax advisor. This will save you a lot of headaches in the end.

Being a successful business owner takes more than talent and creativity, it takes resources and tapping into a network of  professionals.

*TaxCharm blog is not legal advice.  It is meant for informational purposes only.*