Small businesses are a big part of our country’s economic growth, so you would think the government would make starting a business as easy as possible. Of course, this is not the case. If you need a business tax strategy- listen up.
You might think coming up with a great idea and creating a solid business plan would be the most difficult part- that is until tax season comes along. Today we talk to expert business tax planner Diane Gardner about the importance of having a well thought out business tax strategy.
After filing mountains of tax returns, Diane works as a coach the rest of the year using pro-active tax planning to help her clients keep more of their hard-earned cash. She loves creating business tax strategies to help successful entrepreneurs across the United States pay the least amount of income tax they can legally pay.
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Don’t Half-Ass Your Taxes
If you are planning to start a small business, it is critical you research all of the federal, state and local requirements. If you don’t cross all your T’s and dot all your I’s it will cost you. There are many regulations and the rules that can vary between locations and business structures.
Find out what your state requires and how often you need to file. Business taxes need to be filed throughout the year, not just during tax season. This can be challenging, so if you don’t feel comfortable submitting them on your own, there are companies out there that can take care of this for you (of course at a cost).
Not filing your taxes properly can cost you and your business a lot of money. Believe me; Listen Money Matters has had their fair share of fines. Like us, many business owners starting out choose to file their taxes using products like Turbo Tax and that’s a huge no-no.
Although products like Turbo Tax work ideal for simple personal taxes, using it for business is not a good idea if you don’t know what you are doing.
If you have done your taxes before and fear you may not have done the best job, no fear! You can revise your returns for up to three years. Anything before that you can kiss well. Consider it a donation to your country.
A good rule of thumb is to save all your tax paperwork for at least seven years in case of an audit.
Structuring Your Business
When starting a business, you’ll need to figure out how you will structure your company (partnership, LLC, S-corp, C-corp, etc.awesome). Choosing a company type can be a great tax planning tool and can come with impressive tax advantages.
It will also protect you from any liabilities such as a lawsuit. This part can definitely be confusing so consult your attorney to figure out what would work best for your business.
Most likely you will want to go with an LLC because it can act as a Sole Proprietor, S Corp, C Corp -basically anything. However some states are not LLC friendly, like California, so do all your research before filing. The image below links to a great infographic that will help you understand the difference between each structure.
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Moving From Hobby To Business
Most people are not making millions when they first start out. Actually, most are making nothing or close to it and that’s ok. When you are still working on growing your business it can be referred to as the hobby stage. So when does it go from hobby to business?
You may have heard that after three years if your company has not made any profit it will be considered it a hobby and not a legitimate business. This is a myth. After a few years with no profit, the government will look at each business case by case to see if you have a well-conceived business plan they show intention to make a profit.
However, if after five years you still haven’t managed to make a dime you should maybe think about investing your money elsewhere.
Loses during the hobby stage can reduce your personal taxable income if you have a legitimate side business. In case of an audit, be sure you can produce a good business plan that shows intent to make money and that you have gotten any business licenses you might need.
Once your business starts growing, there may be a time you’ll need to hire some workers. To avoid any legal issues or exorbitant fines you’ll need to clearly define what their employment classification is- employee or independent contractor. For most business owners it is a much more financially beneficial to have contractors.
If you have employees, you will need to file both federal and state withholding taxes for each employee as well as match the federal withholding tax. On top of that, most states require you to pay unemployment taxes and obtain workers compensation insurance. At the end of the year having an employee will cost you more then you bargained for.
Everyone should be taking advantage of tax incentives but most people don’t know what strategies to use to save them money. Auto-related deductions, entertainment, and meals are just few of the easy deductions available to business owners.
Even hiring your kids can help you write off health insurance expenses. Certain business entities can deduct a home office if they work out of their home.
If you are already writing off some of these things, be sure to keep all receipts and have all proper documentation. If you are holding business meetings at restaurants you’ll need to keep track of dates, attendees, locations, a dollar amount of check and the agenda of the meeting. Keeping a diary is the best way to protect your deductions.
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Tax Coach 4 You: Diane’s Site
Stop Overpaying Your Taxes: Diane’s Book