Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (113 page)
If you’re an out-of-state retailer, such as a mail order seller who ships and sells goods in another state, be careful. In the past, many retailers have not collected sales taxes on the sales of these goods. Be sure you or your accountant knows the state sales tax requirements where you do business. Just because you don’t have a physical location in a state doesn’t always mean you don’t have to collect the sales tax.
Many states require business owners to make an advance deposit against future taxes. Some states will accept a surety bond from your insurance company in lieu of the deposit.
AHA!The IRS offers a Small Business/Self-Employed Virtual Tax Workshop. It’s designed to help new and existing small-business owners understand and meet their federal tax obligations. Log in at
tax.gov/virtualworkshop
.
It’s possible for retailers to defer paying sales taxes on merchandise they purchase from suppliers. Once the merchandise is sold, however, the taxes are due. The retailer adds the sales taxes (where applicable) to the purchase. To defer sales taxes, you need a reseller permit or certificate. For more details on obtaining a permit, contact your state tax department.
Tax-Deductible Business ExpensesAccording to the IRS, the operating costs of running your business are deductible if they are “ordinary and necessary.” The IRS defines “ordinary” as expenses that are common and accepted in your field of business. “Necessary expenses” are those that are appropriate and helpful for your business. Following are some of the business expenses you may be able to deduct.
Equipment PurchasesUnder the Internal Revenue Code Section 179, expensing allowance, business owners can fully deduct from taxable income a limited amount of the cost of new business equipment in a year rather than depreciating the cost over several years. In 2010, the maximum federal allowance is $134,000, thanks to provisions in the American Recovery and Reinvestment Act of 2009; the maximum allowance falls to $25,000 in 2011. For more information, get a copy of IRS Publication 946,
How to Depreciate Property
, and read “Electing The Section 179 Deduction.” You also can find a free Section 179 calculator at
section179.org
.
Business ExpensesHow to Depreciate Property
, and read “Electing The Section 179 Deduction.” You also can find a free Section 179 calculator at
section179.org
.
Some common business expenses for which you can take a deduction include advertising expenses, employee benefit programs, insurance, legal and professional services, telephone and utilities costs, rent, office supplies, employee wages, membership dues to professional associations and business publication subscriptions.
Auto ExpensesIf you use your car for business purposes, the IRS allows you to either deduct your actual business-related expenses or claim the standard mileage rate, which is a specified amount of money you can deduct for each business mile you drive. The rate is generally adjusted each year by the IRS. To calculate your deduction, multiply your business miles by the standard mileage rate for the year.
If you use the standard mileage rate, the IRS says you must use it in the first year the car is available for use in your business. Later, you can use either the standard mileage rate or actual expenses method. For tax purposes, be sure to keep a log of your business miles, as well as the costs of business-related parking fees and tolls, because you can deduct these expenses.
START ME UPT
he expenses you incur when launching a new business can run into a lot of money. But how do you treat them when it comes time to do your taxes? If you start a business, you may deduct up to $5,000 of startup costs in the year you launch it and another $5,000 in organizational expenses, which include costs related to creating a corporation. These deductions are reduced if you have more than $50,000 of either type of expense. Keep in mind that startup costs that are not deductible in the year you started the business can be amortized over 15 years beginning in the month you launched your business.Amortization is a method of recovering (or deducting) certain capital costs over a fixed period of time. Startup costs include advertising expenses and any wages you paid for training employees and fees paid to consultants.If you spent time looking for a business but did not purchase one, the expenses you incurred during the search may be deductible.
If you use five or more vehicles at the same time in your business, the IRS requires you to use the actual cost expenses method. With the actual cost method, the IRS allows you to deduct various expenses, including depreciation, gas, insurance, garage rent, leasing fees, oil, repairs, tolls and parking fees. If you use this method, keep records of your car’s costs during the year and multiply those expenses by the percentage of total car mileage driven for business purposes.
While using the standard mileage rate is easier for record-keeping, you may receive a larger deduction using the actual cost method. If you qualify to use both methods, the IRS recommends figuring your deduction both ways to see which gives you a larger deduction, as long as you have kept detailed records to substantiate the actual cost method. For more details on using a car for business, see IRS Publications 334 (
Tax Guide for Small Business
) and 463 (
Travel, Entertainment, Gift and Car Expenses
).
Meal and Entertainment ExpensesTax Guide for Small Business
) and 463 (
Travel, Entertainment, Gift and Car Expenses
).
To earn a deduction for business entertainment, it must be either directly related to your business or associated with it. To be deductible, meals and entertainment must be “ordinary and necessary” and not “lavish” or “extravagant.” The deduction is limited to 50 percent of the cost of qualifying meals and entertainment.
To prove expenses are directly related to your business, you must show there was more than a general expectation of gaining some business benefit other than goodwill, that you conducted business during the entertainment, and conducting business was your main purpose.
To meet the “associated” with your business test, the entertainment must directly precede or come after a substantial business discussion. In addition, you must have had a clear business purpose when you took on the expense.
Be sure to maintain receipts for any entertainment or meal that costs $75 or more, and record all your expenses in an account book. Record the business reason for the expense, amount spent, dates, location, type of entertainment, and the name, title and occupation of the people you entertained.
IN THE RED?I
f you find, after you’ve tallied up all your business deductions and subtracted them from your income, that you’re in the red for the year, don’t despair. There’s something called the net operating loss deduction that will help. It allows you to offset one year’s losses against another year’s income.The IRS lets you carry this operating loss back two years and use it to offset the income of those previous two years. Doing so may result in a refund. If you still have some losses left after carrying them back, you can carry them forward for up to 20 years. If you don’t want to use the twoyear carryback period, you can elect to deduct the net operating loss over the next 20 years. However, once you make that election, you can’t reverse it. Remember, if there is any unused loss after 20 years, you may no longer apply it to any income.
You can deduct ordinary and necessary expenses you incur while traveling away from home on business. Your records should show the amount of each expense for items such as transportation, meals and lodging. Be sure to record the date of departure and return for each trip, the number of days you spent on business, the name of the city, and the business reason for the travel or the business benefits you expect to achieve. Keep track of your cleaning and laundry expenses while traveling because these are deductible, as is the cost of telephone, fax and modem usage.
SAVETo help you wade through all the tax laws and regulations, the IRS offers these free publications:
Tax Guide for Small Business
(Publication 334),
Business Expenses
(Publication 535),
Travel, Entertainment, Gift and Car Expenses
(Publication 463),
Circular E, Employer’s Tax Guide
(Publication 15), and
Employer’s Supplemental Tax Guide
(Publication 15-A). To obtain copies of these publications, you can download them from the IRS website at
irs.gov
.
If you use a portion of your home exclusively and regularly for business, you may be able to claim the home office deduction on your annual tax return. This generally applies to sole proprietorships. To claim the deduction, the part of the home you use for your office must be your principal place of business, or you must use it to meet or deal with clients in the normal course of business. Keep in mind that you can’t claim the deduction if you have an outside office as well.
Business owners who keep records, schedule appointments and perform other administrative or management activities from their home offices qualify for a deduction as long as they don’t have any other fixed place of business where they do a large amount of administrative or management work. This holds true even if they don’t see clients or customers in their home offices. The IRS scrutinizes this deduction very carefully, so be sure to follow the rules and keep good records.
Tax PlanningAs you operate your business, be on the lookout for ways to reduce your federal and state tax liability. Small-business owners typically have a lot of ups and downs from one year to the next. If you make a lot of money one year and have to pay taxes on all that profit, your business won’t have the reserves needed to tide you over in some other year when business may not be as good.
That’s why it’s important to defer or reduce taxes whenever possible. This is a good way to cut business costs without affecting the quality of your product or service.
Throughout the year, periodically review your tax situation with the help of your accountant. If your income is increasing, look for deductions to help reduce your taxes. For example, if you are a cash-basis taxpayer, think about doing some needed business repairs or stocking up on office supplies and inventory before the end of the year. Cash-basis taxpayers can also defer income into the next year by waiting until the end of December to mail invoices.
For businesses using the accrual method, review your accounts receivable to see if anything is partially worthless. If it is, you can take a deduction for a portion of the amount of the uncollected debt. Check with your accountant to determine whether you meet IRS requirements to claim a bad-debt deduction.
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