Tax obligations are often a dreaded aspect of starting up a business, but sorting out your tax obligations doesn’t have to feel like pulling teeth! Here are a few tips to avoid common startup tax mistakes so you can make your business—and life—easier in the long run.
- Pay Quarterly Taxes
Quarterly taxes are usually required by the IRS for all entities, including sole proprietors (except during your business’ first year). In some cases businesses can opt to pay annually—but it is considered much more advantageous to pay-as-you-go, since a full year’s worth of taxes is no small amount. Setting aside a percentage of your profit can help you maintain compliance easily.
- Keep Records of All Your Expenses
You get to deduct all “ordinary and necessary” business expenses like office supplies, event fees, and miles driven. But you will miss out if your record keeping is poor or lacking—if receipts are lost, you may not capture the expenses, especially if giving information to your CPA in this manner. Many entrepreneurs pay with cash or from a personal account and forget to track this information when a receipt is missing. If you’re a smart phone user, there are many apps to help you track expenses, mileage, receipts and more.
- Take the Deductions You’re Entitled To—Correctly
If you have a designated office space in your home that is used exclusively for business purposes, you can claim a home office tax deduction. To take advantage of this, your CPA will determine the percentage of your rent/mortgage by calculating the square footage of the office space divided by the square footage of the rest of your property. Recently the IRS has instituted a flat rate write-off as well to simplify the process. You can read more about it in IRS Form 8829.
Equipment and supplies are other deductions you’ll want to take. Each is reported differently on your tax return, so be sure you know the difference: you use supplies during the year which often include things like paper, pens, toner, and paperclips. However, items such as office furniture generally cost quite a bit more and will last longer than one year; these would fall under equipment. These purchases are reported as a capital expenditure on IRS Form 4562.
If you need help with the bookkeeping aspect of tracking your expenses, we can help! Call us at 310-534-5577 or send an email to contact@abandp.com.