The Entrepreneur’s Guide to Tax Season
When Megan first began the design studio on her own in 2009, one of the best things we did was to hire an accountant who could help us organize our business and make sure we filed our taxes correctly. I cannot stress how important this is for anyone trying to make a go at the world of entrepreneurship. In the long run, you will save money and more importantly stay out of prison. Without the help of our accountant in Michigan, who helped us setup the proper business formation for us, we wouldn’t have been able to qualify for a home loan or build a sustainable foundation for our business. In the future, I will do some more posts about what it takes to actually start a business, in the formal paperwork kind of way. For now, let’s just make sure we hit that April 15th deadline.
It’s far to easy overpay your taxes as an entrepreneur, but it doesn’t have to be a difficult process. These types of conversations don’t often happen until many of us are too late. We thankfully took the advice of other entrepreneurs early on and hired the right people to make sure we kept our taxes right in the place. So, I wanted to chat about how we have found a balance between paying in without overpaying. It is the fine balance that any accountant or business person will tell you can be successfully walked. There are more liberal and conservative ways to walk this line and depending on your own opinions and your accountants you can find the right happy medium for you.
Before I get to the list I am going to repeat this over-and-over, I am a creative entrepreneur not a tax or legal expert, so if there is anything I say in this tax guide that contradicts your accountant or lawyers advice – trust them and leave a comment, let’s make this post a resource for everyone. We highly believe in hiring professionals to help you where you need help. It can save you time and money…most important in this case; money. My hope with this post opens the conversation up so we all can learn and grow together as entrepreneurs. Some of you may have suggestions and ideas I haven’t even found yet. I would love to hear them! Having said that, I am also collecting all of these resource from other places that have been helpful to us in the past, Check out freelancersunion.org and http://www.irs.gov/Credits-&-Deductions and http://blog.bench.co for more details.
I should also note, I am writing this post from my own perspective as a joint owner of an LLC with employees and contractors, if you are a freelancer, many of these things will still be true but may look a little different and you should look to your accountant for the correct way to file for your needs. We will likely write more blog posts about taxes in the future, but for this post I want to focus on two general areas you need to focus on when preparing your business for taxes, or preparing your information to give to give to an accountant:
1. How much money did you make in the pervious year?
To begin, you should have a total dollar amount you made in the previous year. Generally this follows the calendar year but you have the option of setting up your fiscal year to end at different points. That all gets pretty confusing for me, so we just keep Dec. 31 as our fiscal end of the year. This is very typical, but if you are paying quarterly taxes, as most business owners and freelancers do, I believe you can determine your own fiscal year. But let’s keep it simple for this post. If you aren’t currently filing quarterly, I highly suggest making this happen. There are some penalties that can occur if you make over a certain amount and also it can be beneficial especially if you don’t like writing large checks that make your heart fall to your toes. If you end up overpaying, meaning you didn’t make as much as you projected, you get some money back at the end of the year in the form of a return. thats your entrepreneurs holiday bonus check!
2. How much can you write-off?
One of my major misconceptions about write-offs early on was how they actually worked. Instead of explaining what I faulsely thought I want to give an over generalized example of how they do work. Let’s say I made $100,000 in a year, and had $30,000 worth of business write-offs. That would mean instead of being taxed on $100,000 of income, I would only be taxed on $70,000 of income, which could be the difference of $4500-$9,000 (15%-30%) savings. However with all things tax related there are rules and restrictions. Making sure you know your categories for write-offs is important. This list can help you strategize where to spend money throughout the year and where not to. For instance, you may be more likely to attend a conference because it can be written off as education than if you hadn’t known that. You may also be more likely to think about a child as a business owner knowing you can write-off the expense of childcare. All these things can make a difference in your income, taxes, and business plans. Here is our list we have applied or plan to apply at some point in our own business:
- Home Office: Two options, Regualr Method – deduct the percentage of your home office space square footage from your overall square footage. Second option the Simplified Option – you can write off up to 300 sq. ft at $5 per sq. ft. The IRS has more info here on it.
- Utility Expenses: You can write off a percentage of what you use if you are using any utilities for business. If you have specific lines between what you use for business and personal than you are able to write off all of the business utilities you use. These can be things such as electricity, internet, phone, and even trash if you have a space of operation for your business that you pay for trash. Anything that literally keeps the lights on for your business.
- Business Meals: You can write off up to 50% of all business related meals. You need to indicated the amount of the meal, the date and place, and the relationship of who participated with you in order for it to qualify.
- Travel Expenses: In order to qualify you must travel far enough from your place of work that you need to sleep elsewhere. The IRS offers a full list of travel expenses that qualify within their topics section.
- Business Use of Your Car: This applies to both purchasing a car dedicated to business or writing off your mileage used for business. You can take a standard deduction of 56 cents per mile. This shifts each year so check with your accountant. Also, if you are purchasing a vehicle for business purposes we highly suggest connecting with your accountant on advice and a breakdown of the best options for working this out for your business.
- Business Insurance: Any sort of insurance you take to insure your business can be written off on your Schedule C. This includes a percentage of home or renter’s insurance if you are writing off your home office.
- Medical Care Expenses: If you pay for your own medical premiums you can deduct those here. You can also deduct any additional medical costs you have for the year unless you are able to participate in your spouse’s plan than you cannot.
- Education: If you are pursuing any sort of additional education to keep you up to date in your professional field. You are able fully deduct these expenses. To find out the exact costs you can deduct see a full list here.
- Charitable Contributions: Any charitable contributions you make from your business you are able to deduct. There are various ways depending your business structure that they will be handled so make sure to discuss these contributions with your accountant so they can device the best plan for you.
- Retirement Contributions: If you contribute to an IRA these amounts can be deducted. This contribution will be seen on Form 1040 which you should receive similar to how you receive 1099s.
- Business Interest and Bank Fees: Any fees you incur during the year on loans you have taken for the business or were charged for bank usages can be written off on your Schedule C.
- Child and Dependent Care Expenses: The cost of placing your child in daycare or having in home care in order for you to run your business is a fully deductible expense for the year. Enjoy it!
- Mortgage Interest Paid: If you own property you are able to deduct any interest on your mortgage whether you improved your home, built it, or bought it. Any interest related to your home ownership is deductible when you file Form 1040.
- Moving Expenses: if you move your office or have to relocate for your job (over 50 miles) you are able to deduct moving expenses for the year. To find out more use Form 3903.
- Legal and Professional Fees: If you hire a lawyer, accountant, bookkeepers, or any services that help you manage tasks of your business that are necessary than you are able to fully deduct these expenses from your taxes under your Schedule C.
Those write-offs listed should prepare you for tax season with your accountant. Cataloging and categorizing these items whether in a program like Bench or Quickbooks will help your accountant quickly file your business and personal returns and save you money with the accountant.
It used to be that tax season was dreaded, but now knowing the above and having hired an accountant who is there for us when we feel lost or confused, we feel less pain and stress this time of year. Our hope is that this will be helpful to any of you trying to figure out the process of taxes as an entrepreneur.
As I said above, if you see something we missed, have further questions, or have anything to add please share comments below. We would love to hear about your own experiences and how you have figured things out for yourself.
A few additional sources you may want to check out:
A Full List of other Deduction from Bench
What to ask your Accountant to help lower your next Tax Bill.
A Tax Check List for LLC’s and Partnerships from Bench
Line by Line Break Down of Schedule C
A Guide to Tax Write-offs for Freelancers