It’s one thing to start a small business. It’s another to manage the finances. There is a lot to consider when wrapping up your end-of-year tax return, and it’s much different than handling your personal taxes.
Thankfully, there are some not-so-complicated hacks out there that could save you money and make the process easier to manage. Here are five tips you may not have known about your small business taxes.
Tax Credits vs. Tax Deductions
What many people don’t know is that there is a difference between tax credits and tax deductions. Usually, we think about various “write-offs” that can be used to lower our overall tax return, such as donations or office supplies. But most likely, you’ll save more money with tax credits than deductions.
If you want to reduce the amount of taxes you owe, a tax credit will be the best bang for your buck. It’s based on the overall amount of taxes you owe at the end of the year. Tax deductions, on the other hand, lower how you are taxed on your income. For small businesses, it usually ends up saving you more, in the long run, to focus on your available tax credits.
Keep Track and Save Your Receipts
The important thing to remember is that you can either do tax credits or tax deductions, but you can’t do both. If you are planning on doing deductions, you won’t want to get lazy with record keeping. Make sure to save all of your receipts and keep track of every expense. There are apps you can use that will help you take inventory of everything and keep it organized so you won’t be scrambling come tax season.
There are more available deductions than you might think, but not everything you purchase for the company is permitted. This is where it gets a little tricky. Hiring a CPA will be able to make sure you are in control of your finances and aren’t mixing business with pleasure. You won’t want to receive an audit only to find out you’ve been blurring the line with your tax deductions.
Start a Retirement Plan
Contributing to a retirement plan, 401(k), or IRA are all tax-deductible. This applies to someone who may have employees or not. If you’re a freelance writer, graphic designer, or some other form of independent contractor, you may be eligible to open a 401(k). Other people who have started a small business can also opt-in to contribute to the same retirement options they provide their employees as well.
Deduct Your Car and Your Home Office
Did you know that you can deduct your vehicle as a tax write-off? Like your home office, a vehicle used for business purposes can be used as a tax deduction. While your daily commute to your office or coworking space is not deductible, drives to meetings and other business commutes are qualified. Don’t forget about maintenance on your vehicle since it’s used for your business as well, along with any parking or tolls you may have encountered on that off-site meeting.
A home office is also eligible for a tax write-off, despite the fact that you live within the space of your office. The easiest way to do this is by multiplying the square footage of your office by $5. The office space, however, cannot exceed 300 square feet. If your office is larger, you can alternatively use the percentage of your office for the entirety of your home. For example, if your home is 6,000 square feet, and your home office is 600 square feet, you are eligible for a 10% deduction.
Hire a Professional
Remember, when in doubt, you should always hire a professional to do the work for you. Handling your small business accounting can be a lot to manage in general, especially when it comes to your taxes. Hiring a CPA can save you and your business time, and they will be able to find ways to save more money than you might be able to without having their knowledge or expertise.