13 Tax Tips for Running a Business

Starting your own business can be tremendously rewarding if you do it right. From business plans to market strategies, there are a lot of important financial decisions ahead.

One of the most common challenges when running a business is figuring out how to handle your taxes. It’s understandable that you might be intimidated by the process, but with some organization and planning, you can alleviate a lot of the stress ahead of time.

1. 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 having a reasonable expectation of earning a profit. To demonstrate this, write out a business plan and document your marketing and management efforts. The IRS presumes that your activity is a business if it makes a profit during at least three of the past five tax years.

2. 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, the cost of a computer you buy for business use, daily appointments, and anything else that could help you to substantiate your tax deductions.

3. Keep personal and business finances separate

When you file your business taxes, you don’t want to include any personal expenses. For this reason, keeping your personal and business finances separate makes your life much easier when it’s time to file your taxes. 

Start by opening a small business bank account and use that account for any business-related expenses. At the end of the year, you can write off expenses from that account without worrying about sifting through all your transactions.

Additionally, when you’re setting up utility accounts or applying for credit, you’ll likely want to open it under your business name.

4. Report your income as you receive it

Most small business owners 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 when paid.

Typically, businesses with average annual gross receipts of $27 million or less in the prior three-year period may use the cash method. The cash method gives you greater flexibility to save taxes by shifting income and expenses between years.

5. 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 may be able to claim a home office deduction for a portion of your expenses related to utilities, rent or mortgage interest, cleaning, and the like. You can even take this tax deduction if you provide products or services at other locations.

6. Understand all eligible deductions and credits

When you’re starting a business, filing your taxes can be overwhelming. However, it’s important to have a solid understanding of which deductions and credits you’re eligible for and how to claim them.

If you use vehicles for business purposes, you can use the standard mileage rates or deduct actual vehicle expenses. With clean vehicle credits, you may qualify for a tax credit if you purchased an electric vehicle (EV) or fuel cell vehicle (FCV).

You may also be able to deduct various business expenses, including advertising, business meals, exclusive home office use, rent expenses, and more. With TurboTax Live Business, a tax expert can help you make sure you’re claiming all the credits you’re eligible for.

7. Choose your business entity carefully

Many small business owners rush to incorporate their business when the truth is that it may be more costly to incorporate for someone who is self-employed. Once you incorporate, you’ll be subject to additional costs like payroll taxes on your income. This includes worker’s compensation and unemployment taxes. 

You may also be responsible for an annual franchise tax in the state in which you operate. Also, before you incorporate, remember that business deductions are generally the same for self-employed people as they are for corporations.

8. Set reminders for tax deadlines

You have to meet different tax deadlines as a business owner, especially if you have to pay quarterly taxes. Anyone who expects to owe at least $1,000 in taxes when filing a return is required to pay quarterly taxes.

Quarterly taxes are paid four times during the year and typically due: 

• April 15
• June 15
• September 15
• January 15 (of the following year)

You’ll need to pay your estimated quarterly taxes by these deadlines.

You still have to file a tax return in addition to paying quarterly taxes. You can use a business tax checklist to make sure you’re filing and paying your taxes on time.

9. Set aside money for paying taxes

When you’re a business owner or self-employed individual, you’re responsible for setting aside money to pay your taxes. Maintaining clean books and paying your taxes on time can be a challenge if you previously had your taxes withheld as an employee.

There are four quarterly tax deadlines each year, so make sure you’re setting aside money for taxes as you’re receiving it. If you need help figuring out how much to pay in estimated taxes, one of our tax experts can help you.

10. Consider employing your child

It’s not unusual for business owners to employ family members, but did you know there are tax benefits of employing your children?

When you employ your child, you can deduct their wages as a business expense to save on taxes. You can pay each child up to $14,600 per year (in 2024) before they’re subject to income tax, and payments to children under 18 aren’t subject to FICA or FUTA taxes.

Keep in mind that there are rules and regulations you must follow when employing your children.

11. Contribute to retirement

Retirement plans offer several benefits for employers and employees, but there are tax benefits you may not know about as a business owner. If you’re a business owner or self-employed, contributing to retirement can benefit you when it comes time to file.

Employer contributions to retirement plans are deductible on your federal tax return, which means you can contribute to a retirement account and reduce your taxable income.As a self-employed individual, you can deduct contributions you make to your own retirement plan. However, there are rules regarding how much you can deduct and what’s deductible depending on which type of retirement plan you have.

12. Make charitable contributions

Whether you’ve been running a business for years or you’re just getting started, you’ve probably heard business owners talk about writing off charitable contributions.

If there’s a cause you believe in, make a charitable contribution to an organization that aligns with that. As long as you’re making a charitable contribution to a qualified organization, you can include that contribution in your eligible deductions.

13. Stay up to date on tax law changes

From tax credit eligibility requirements to income tax rates, tax laws change all the time. Keeping up with these changes can help you plan for the next tax season and claim any deductions and credits you qualify for.

You can refer to our tax law guide to learn more about recent tax law changes and how they affect your business. Alternatively, you can work with a tax expert who specializes in tax planning to make sure you’re prepared for filing ahead of time.

Don’t worry about knowing these tax rules and how to claim business income and expenses. With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.