If you are venturing out on your own, congratulations! Starting your own business can be tremendously rewarding if you do it right. Here are some tax tips to get you off on the right foot.
- Operate as a business, not a hobby. Losses from a hobby are not tax deductible, so it is important for the IRS to view your business as a having a reasonable expectation of earning a profit. To demonstrate this, write out a business plan and document your marketing and management efforts. Of course, the best way to demonstrate these things is to actually make a profit. The IRS presumes that your activity is a business if it makes a profit during at least three of the past five tax years (at least two of the past seven years for horse-related activities).
- Document your income and expenses. You are required to keep track of your income and expenses so that you can accurately report them to the IRS on your annual tax return. Keep track of car mileage, business dinners, computer use, daily appointments, and anything else that could help you to substantiate your tax deductions.
- Report your income as you receive it. Most small business owners with gross receipts of less than $1 million a year find it beneficial to report on the cash method of accounting, where income is reported as it is received rather than when it is billed, and expenses are reported as paid. The cash method gives you greater flexibility to save taxes by shifting income and expenses between years.
- Deduct an office in your home. If you regularly and exclusively use part of your home to perform administrative or managerial activities for your business, you can claim a home office deduction for a portion of your expenses related to utilities, rent or mortgage interest, cleaning and the like. You can take this tax deduction even if you provide products or services at other locations.
- Choose your business entity carefully. Many small businesses are unincorporated, but if you want the limited liability benefits of a more formal structure, consider organizing your business as an S-Corporation or Limited Liability Company (LLC) taxed as a partnership. Losses of these entities flow through to the shareholders. In the first years of a business, when losses are often higher, these entities can be used to reduce overall taxes. Later on when profits are high you may want to convert to a C-Corporation to take advantage of the corporate tax rates and employee benefit plans that are available through corporations.
Don’t worry about knowing these tax rules and how to claim business income and expenses, TurboTax ask you simple questions about you and helps you easily file your taxes based on answers to your questions. If you are self-employed you can also use QuickBooks Self-Employed to track your business income and expenses, estimate your quarterly taxes, and your information can easily transfer to TurboTax Online Home & Business making tax filing effortless.