Separating your personal and business expenses
If the IRS has questions about your business’s taxes, they will want to see itemized records of your taxable income and expenses. You should be able to produce your bookkeeping, including bank account records showing all cash inflows and outflows and receipts for any major purchases or expenses claimed.
Providing proof of your business expenses can be messy and time-consuming if you use your personal bank accounts to fund your business. Even if you use personal funds to keep your business afloat, you should still use separate accounts for personal and business expenses. Not only can this help you track expenses more accurately, but it can also save you time when filing your taxes.
Complete your year-end accounting
Part of doing your taxes is understanding your income and expenses, which comes from completing your year-end accounting. When you complete your accounting year end, you better understand your annual income and expenses.
From there, you can strategically minimize your taxable income by claiming tax deductions. You can look for these deductions by looking at your expenses.
Understanding deductions
On your personal income tax returns, you can take tax deductions for things like child care, medical expenses or mortgage interest. As a business owner, you can access small business tax deductions that help offset some of the taxes you owe, minimizing out-of-pocket tax payments.
The first step in taking advantage of business tax deductions is to keep accurate records of all incurred expenses during the tax year. Here are a few of the most common deductible business expenses, along with what you should track for tax purposes:
Cost of goods sold
If your business sells tangible goods, you can deduct certain expenses associated with buying, storing, manufacturing and distributing your goods. To claim this deduction, track the purchasing costs of any items you buy for resale or any materials you buy to produce a finished good.
Mileage deduction
If you travel for any part of your business, and use your personal vehicle, keep a logbook of your business mileage. The IRS allows you to take the standard mileage deduction or track and deduct your actual business use auto expenses.
Home office
If you work from home, you may qualify for a home office deduction. You should track any expenses you would have if you operated from a traditional office. This may include physical space, internet service, software (including tax software), public utility costs and office supplies.
Insurance premiums
If you pay for health insurance, business insurance, commercial auto insurance or workers’ compensation coverage, your insurance premiums are often deductible through your business.
As with any deduction, the IRS states that your deductions must be “ordinary” and “necessary” for your business. With insurance premium deductions, you can typically deduct insurance you must have to operate your business. Read more about business insurance deductions.
Employee pay
If your small business has employees, any payroll costs you incur are tax-deductible.
Start-up costs
Depending on the amount, you can write off certain start-up costs, such as purchasing equipment that will be used strictly for business purposes. As you are starting your business, keep receipts for any business purchases.
Paying taxes quarterly vs annually
If you’re paying your small business taxes for the first time, the bottom line can hit you hard. That’s because, at a traditional W-2 job, your paycheck withheld money for things like Medicare and Social Security, and your employer paid some taxes on your behalf. When you’re self-employed, you pay the taxes of an employee and employer.
That’s why the IRS recommends paying taxes quarterly rather than annually. Ultimately, it’s your decision, but you aren’t responsible for such large tax bills when you pay taxes quarterly. You can plan for taxes better. Additionally, if your estimation is off, you can adjust by making a smaller quarterly payment later.
If your goal is to lower what you pay on taxes, then making quarterly payments helps you keep an eye on strategic deductions as you go about your year as well.
Don’t let the filing deadline sneak up on you
Missing IRS deadlines can result in costly fees and interest charges on your tax bill. To help make sure you don’t miss your deadline, follow these simple steps:
- Be aware of any quarterly and annual tax due dates that apply to your business.
- Have your tax forms printed in advance, and be sure you know whether you can file business taxes online or if you’ll have to mail your returns instead.
- Since tax returns can be time-consuming to complete, make it easy on yourself by keeping all your business tax documentation in the same place, including a complete listing of any allowable expenses.
- Start preparing your returns early so you don’t run out of time before a filing deadline. Taxes are also much easier to submit on time when you keep a running list of expenses such as payroll, healthcare premiums and utilities.
Listen, tax planning requires ongoing effort on your part, and your tax system will be most effective when you keep careful records throughout the year. If you are just starting your small business, plan how to organize your tax records right from the beginning.
Consult with a certified professional accountant (CPA) or licensed tax professional to ensure you take all the right steps and maximize your deductions.
How NEXT helps small businesses
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Whether you’re just starting or looking to grow your business, we can help. Our easy online tools can help you get a quote, purchase coverage and secure your certificate of insurance in minutes.
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Next Insurance does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
