5 Handy Tax Tips Small Business Owners Need to Know Going Into Tax Season

The 2020 tax season isn't a part of the year that many people are looking forward to. Business owners, in particular, are less thrilled than most due to the extra work they have to put in while filing.

But, there are a handful of tax tips you can take advantage of that many entrepreneurs may not know about.

Not sure where to start? Don't worry, we’ve got you covered.

Let's take a look at everything you need to know.

 

1. Prepare For Your Taxes Throughout The Year


While a regular employee only has to worry about taxes once per year, small business owners have a handful of dates they need to keep in mind.

These include when you need to:

As you can see, there's a large handful to keep track of compared to the average individual. You can make your life far easier, though, by marking all of these dates down on a calendar and preparing for them as the year goes on.

That way, you won't be pressured to meet short-term deadlines that you forgot about.

 

2. Deduct All That You Can


At first, small business owners are expected to pay a significant portion of their income in taxes. This amount is approximately 20% but could be more or less depending on what type of business you own (partnership, sole proprietorship, etc.).

Fortunately, though, you can deduct business-related expenses from your gross income in order to save money on your taxes.

For example, let's assume that your company's gross income for the past year was $100,000. If no deductions at all were made, you'd likely owe approximately $20,000 in taxes.

But, let's also assume that you had to spend $30,000 on essential equipment that drastically increased your company's productivity. As long as the type of equipment and its usage fall under the IRS guidelines for deductions, you can subtract this amount from your gross income.

After other miscellaneous deductions, you find that your business's net income is only $50,000, meaning you owe 20% of this amount instead. As a result, your tax obligations would be around $10,000.

The type of deductions you can make will depend on the type of business you run and the industry you're in. You can consult the IRS's website to find out more details.

 

3. Avoid Getting Audited


While audits aren't exactly a common occurrence, they can prove to be both inconvenient and financially straining if they happen to you.

The most common reason for getting audited is due to underreporting your business income. But, the types of deduction you make could also play a role.

A frequently-seen scenario where business owners are audited is when they make large deductions in the 'Other' or 'Miscellaneous' category. Since large business expenses are only supposed to be deducted if they're relevant to your industry, you should be able to find a category to place them in.

Significant ambiguous expenses may signal to the IRS that you're attempting to pay less money in taxes by cheating the system.

You could also face an audit if you classify your employees as independent contractors. While this is a mistake that new business owners sometimes make, there are entrepreneurs out there who do so in order to avoid paying increased taxes.

The penalties are steep, too— you can expect to pay back-taxes along with extra in fines if you get caught.

 

4. Keep Business Expenses and Personal Expenses Separate


Much of the difficulty that comes with filing business taxes is the amount of time it takes to get all of the numbers you need. This is especially true when it comes to things like food, gas, etc. that you purchase for your employees or clients.

A simple fix, though, is to use a separate credit card for all of your business expenses. A business credit card, in particular, is the best option here.

Not only will it provide you with a way to keep all of your company's transactions in an accessible area, but many business credit cards come with notable benefits (such as rewards, cashback, etc.).

Additionally, you'll be able to easily prove your expenses in the rare event that you get audited.

 

5. Avoid Scams


Unfortunately, there are plenty of scams out there that prey on those who are unwary (or simply not paying attention). Some of the most common are phone calls or emails claiming to be from an IRS employee.

When you receive these messages, they'll often attempt to create a situation of urgency. 'You're being audited, contact us immediately' or 'our records indicate that you owe X amount in unpaid taxes, please call us as soon as possible' are common phrases they may use.

For this reason, the IRS will only ever contact you through certified mail. You'll get an official letter from the agency that outlines their concerns and ask you to contact them at their main number.

Keep this information in mind when tax season comes around to avoid dealing with potentially-devastating complications.

 

Taking Advantage of These Tax Tips Can Seem Difficult


But it doesn't have to be.

With the above information about these tax tips in mind, you'll be well on your way to ensuring your filing process goes as smoothly as possible.

Want to learn more about how to create a website for your business? This article has plenty of useful information.

 

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