That dreaded time of the year is quickly approaching, when we have to add up our pluses and minuses to report to the IRS. If it’s your first year declaring taxes for your start-up, it’s even more important to research the rules of deductions and not to miss out on any opportunities to lower your taxes. We put together a list of a few of the things that can bail you out come tax season.
The Start-Up Phase
Before your business is up and running, you are likely to have incurred many expenses from the process of analysis to building your business, which you can deduct. This period is called the startup phase and goes on either until you open up your doors for business or until you start earning income from your business. This means that once you have launched your business or made the first sale, your costs are now considered tax-deductible expenses. Start-up costs include employee training, wages, consultant fees, advertising, and incorporation or organization fees, but remember that once your startup is launched, these costs no longer fall under the category of start-up expenses. The IRS also warns of what you cannot deduct as start-up phase expenses, such as interest, taxes, or research and experimental costs.
How much you can deduct in start-up costs, depends on the amount of your deductible expenses. If they don’t exceed $50,000, you can deduct $5,000. However, if your costs exceeds $50,000, the amount you are able to deduct during your first year’s taxes, will be decreased by the amount that you exceed $50,000. As an example, if you have $53,000 in start-up costs, you can deduct only $2,000, which is $5,000 minus the amount above $50,000.
If you exceed $55,000 in expenses, you won’t be able to deduct any of these costs in the first year. Instead, they will have to be amortized over the following 15 years. This can be beneficial since many startups don’t make much money during the first years, and the deductions will help later when they are more profitable, in order to minimize taxes. There is a third option of postponing the deduction of start-up costs until you sell or close the business, but usually business owners don’t wait this long to take advantage of tax benefits. If your business is a corporation, partnership, or LLC, you can take an additional $5,000 off for organization expenses, which makes a total maximum of $10,000 in deductions the first year.
What to Deduct?
Most of us are familiar with such obvious deductions as office space and material, phone, fax and wi-fi, travel, business meetings, business lunches, inventories, wages etc, and on the IRS website (irs.gov) you can easily read up on the percentage and maximum amounts permitted for the deductions. However, there are deductible items for your business that are less obvious, and of which you may be unaware:
– You are allowed to deduct membership fees and annual dues of local, state, or national industry organizations, which allow you to network and gain important industry contacts.
-Don’t forget to deduct the cost of industry-related magazine subscriptions, along with other such resources which allow you to keep up with your industry. They are tax deductible, and many smaller write-offs adds up.
-Travel costs to business meetings include airfare, hotel, meals, taxis, Uber, car rental, gas, and parking costs. Make sure to save itemized receipts.
-Donations to IRS-recognized charities are tax deductible and can therefore help lowering the profit if needed. Eligible organizations include Salvation Army, Red Cross, Boy Scouts, as well as and government organizations that exist for public purposes such as public libraries, so there are plenty to choose from.
-Retirement plans offer safety for the future along with tax advantages for the present, both for yourself and your employees.
-Remember that business owners and sole proprietors are eligible for health insurance deductions.
How you file your taxes doesn’t matter if you don’t keep records to back it up in case of an audit. Make sure to read up on the IRS (irs.gov) specifications of what paperwork to keep, how to keep it, and for how long. Basically, all documents that identify your expenses, the recipient and the amount, and the proof of payment need to be kept, along with canceled checks, account statements, credit card receipts, credit card statements, all invoices and petty cash slips. You need to save gross receipts such as deposit information, receipt books, invoices and Forms 1099-MISC.
For asset records, you need to have documents to show when and how the asset was acquired, how much it was purchased for, improvement costs and deductions taken such as depreciation and casualty loss. You also need to explain how you used your asset, and the selling price if you exposed of it along with expenses of the sale such as purchase and sale invoices, closing statements, and any canceled checks.
These are just a few reminders to help you prepare for your taxes, in order to make most out of the different areas of deductions allowed by the IRS.
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