How Start-Ups and Established Businesses Can Make the Most of Taxes
Entrepreneurs want to save every cent they can. Here are 5 pieces of advice, whether you’re an established operator or just starting out.
Tax-time doesn’t always need to be a big bite out of your bottom line. There are a variety of methods available to entrepreneurs which can represent significant savings, either immediately or over time. Take a look at five of them:
Capitalize on start-up benefits
Expenses quickly mount for start-up businesses. Even researching how to get an enterprise off the ground can take time and money. Federal law supports entrepreneurs by providing research and development deductions when that research results in the successful opening of a business. This benefit does not apply if the research does not result in a business being launched.
Research and development deductions allow entrepreneurs to deduct up to $5,000 of start-up expenses during their first year in business. The remainder of the start-up costs can be deducted over a period of years in equal installments. Expenses which qualify for this deduction are:
- Salaries/Wages/Employee training
- Investigating possible sites for a business
- Consultancy fees
- Product or market research
- Ordering supplies
Claiming on wear and tear and depreciation
The Modified Accelerated Cost Recovery System is how the IRS calculates the depreciation of business assets. Except for land, the IRS deems most tangible property as depreciable.
Wear and tear on buildings (providing they are owned by the taxpayer and used for an income-producing activity for longer than a year), furniture, equipment, vehicles, and machinery all qualify, as do some intangible properties like computer software, patents, and copyrights. Depreciation can be claimed overtime or taken in a lump sum.
The Tax Cuts and Jobs Act made some amendments in 2018 to depreciation claims made on business premises, automobiles, and personal-use items. These changes were particularly valuable to small business owners, as they allowed them to expand their scope of expenses. Entrepreneurs can catch up on all changes via the IRS website.
Claim deductibles on hospitality and travel
Entrepreneurs can deduct 50 percent of dining and entertainment costs, provided they are incurred when entertaining business guests. Always record the names of the individuals present and the business discussed to provide the IRS with complete records. Retaining all receipts will accurately record the time, place, and cost of the entertainment/meal.
Travel expenses are fully tax-deductible and apply to a wide range of related expenses. Entrepreneurs operating their own vehicle can claim for fuel, repair, and insurance expenses as well as a number of miles traveled in that year.
Claiming by the mile uses the standard mileage rate released annually by the IRS. Entrepreneurs selecting this method must use it for the first year, after which they may switch to the actual expense method. This considers operating costs for the vehicle multiplied by the percentage of business use.
It’s essential to keep receipts for all travel expenses including hotel/lodging costs like room rates, meals, and telephone calls. Entrepreneurs can use an app which accurately tracks miles traveled to provide proof to the IRS.
Claim on your home office
If you’re regularly and exclusively using part of your home as an office, you could qualify for this deduction. It must be your principal place of business; entrepreneurs generally can’t have another office elsewhere on business property, but some exceptions do occur. Alternatively, space must be used to meet with clients. This deduction also applies to extended and free-standing parts of your property such as garages, studios, and barns.
How much you’ll be able to deduct depends on two things: the size of the space and whether you apply a simplified calculation or a regular one. The simplified option allows for deductions on home office space up to 300 square feet at $5 per square foot. The regular method requires determining the expenses of the home office such as mortgage interest, utilities, or repairs.
The regular method is typically based on the percentage of the home being used for business, so it’s necessary to know that number when applying for a deduction. This is achieved by dividing the square feet of the office by that of the entire home.
A 2,000 square foot home with an office of 200 square feet equals 10 percent of the home used for business, equating to a 10 percent tax deduction toward maintaining your home.
Get advice from the professionals
Staying current on tax deductibles can be a full-time job for entrepreneurs. Around 80 percent of all Americans missed an important change when filing 2018 taxes, meaning they could lose out on a refund. It can be even more costly when a business makes a mistake.
The IRS also adds a late payment penalty on the outstanding amount if a tax return error results in owing more tax than you filed. The penalty rate is 0.5 percent a month up to 25 percent of the total amount owed. Businesses will also be charged daily interest until the total is paid.
We don’t recommend going it alone on your taxes to cut down on expenses. Working with Provident CPAs is an investment that could save you a great deal of money and time in the future. Our collective experience lowers taxes legally and ethically, helping our clients take control of their finances and get closer to prosperity.
Provident CPA and Business Advisors offer a wide range of services in tax, accounting and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.