Online Incorporation MaxBlog

It’s the three letters that can send shivers down the spine of any small business owner—IRS. Don’t mess with them, and the hope is that they won’t mess with you.

It’s a good rule of thumb, but unfortunately, because of this motto, many owners miss out on plenty of legal deductions they can claim for their small business. Oftentimes, even the most savvy entrepreneurs overlook all their options.

Before you do your taxes, check out this list of deductions you can claim to minimize the federal toll on your small business and maximize the net profit of your company. Some of the options may surprise you.

1. Home office: The key to avoiding an audit from the IRS when it comes to claiming a home office deduction is knowing what exactly they define as a home office. According to tax specialists, this must be a space that is solely devoted to office work, not doubling as a family-computer room or guest bedroom. The home office deduction can also be applied to a part of a room. Just measure the square footage of your work area and divide it by the square footage of your home. That percentage is what is deductible for business expenses. Just make sure the home office falls under the specific guidelines defined by the IRS.

2. Office supplies: Keep all the receipts you receive for office supplies—paper, printer ink, staplers, pens, post-it notes, you name it. The stack of receipts at the end of the year may be a hassle, but can pay off by offsetting your taxable business income.

3. Furniture: There are a couple different options when it comes to deductions for office furniture—100% deduction on the year of purchase or a depreciative deduction over 7 years—but either way, be sure to take advantage of this one. Furniture really adds up, and using it for deductions can really bring down taxable income.

4. Other equipment: This covers all remaining office equipment not specified in the supplies or furniture deductions—laptops, copiers, fax machines, etc.—and work the same way as furniture deductions with depreciative or 100% deductions.

5. Software and subscriptions: Whether it’s a computer program needed for the operation of your business, or a subscription to a magazine of your industry, you can claim these deductions on your taxes. As of recently, business owners can take the total cost of the software or subscription as a full deduction within the year they were purchased, rather than depreciate the cost.

6. Mileage: If you drive for your work, the IRS gives you money back for business-related driving expenses. The catch? They need documentation. So keep a notebook in your car to record all dates, mileage, tolls, parking costs, repairs, and reasons for the trip. But remember, only claim a deduction for business-related travel. Taking your kids to school in the minivan doesn’t count.

7. Travel, meal, entertainment, and gifts: In addition to mileage, you can receive deductions for airfare, hotels, restaurants, car rentals, and other travel expenses from being away from home for business. Plus, except for restaurants, all of these items are 100% deductible. Eating out is only covered by 50%. So eat cheap, and stay in a nice hotel—or just get room service. Gifts directly for clients are also 100% deductible. Again, keep those receipts!

8. Insurance premiums: If you are paying your own health insurance premium, and are not eligible for any other health care coverage (from your spouse for example), then the good news is that this is also 100% deductible. There are limits to this claim, such as the deduction cannot out-value the net profit of your business, so review the IRS guidelines to see if you are entitled to this deduction.

9. Retirement contributions: Business owners who are self-employed and saving for their own retirement shouldn’t forget to claim a deduction for their contribution.

10. Social security: Here comes the bad news—self-employed entrepreneurs are considered both employee and employer, and thus have to pay double for social security. Luckily, half of the contribution can be deducted on your 1040, so it all works out in the end.

11. Telephone charges: When your phone bill comes in, record the business-related calls and total up the cost. Add up the 12 bills at the end of the year and claim the 100% deduction. It’s that easy, and can be a huge saver.

12. Child labor: We aren’t talking sweat shops here. But employing your children can give you a nice tax break. The IRS does not charge Social Security tax for business owners that hire their children while they’re under 18 years old, and you can deduct their salary as a business expense. The catch is that you must be the sole proprietor of the business, or be in a partnership with your spouse as the only other proprietor. This is a nice way to save a little money and teach your child how to save at the same time.

These are just a few of the ways you can keep more of your hard-earned money away from the clutches of the IRS and in your pocket.

Small business owners don’t have to live in constant fear of being audited. Know your options, including states with the best tax climate, and take advantage of all the opportunities you have—not a bad rule to follow for business and life.

You’re partners in life, and you think you’d be great as partners in business, as well. It’s entirely possible that you’re right. Unfortunately, it’s also entirely possible that the stress of business ownership will cause its own set of problems.

Don’t take that as discouragement, of course. Successful companies all over the country are joint ventures between spouses. You just need to make sure that your relationship and business goals fit together in the right way.

Starting a Business Together in a New Marriage

Don’t. This may seem a bit harsh, but seriously, don’t. Wait it out a while, until you’re sure you’ve learned how the two of you work together in stressful situations. This is especially true if marriage is your first time living together. You need to know if you can survive the little challenges like arguments over the position of the toilet paper before you can be ready to survive all that starting a business can entail.

Establish Your Roles

Before you even file that first piece of paperwork for incorporating your business, make sure you each know – and are comfortable with – your assigned roles and duties. Put it in writing and make sure you each sign off on it.

Keep it Separate

This is easy if you have a brick and mortar, but if your business runs from your home it might create a bit more of a challenge. Regardless, to safeguard both your marriage and your business, you need to establish a clear separation between when work is going on and when it’s time for home life.

Incorporate Your Business

If you don’t incorporate, then as a married couple your business automatically becomes a partnership in the eyes of the government and the IRS. If you do incorporate, however, your married status could help you.

If you qualify under the Small Business and Work Opportunity Act of 2007, you can have your business considered a sole proprietorship in the eyes of the IRS. You’ll each have to report a portion of your business income separately, but the benefit of that is that by doing so, you each contribute to and receive credit for Medicare and Social Security.

On the other hand, not incorporating and allowing the automatic partnership means that only one of you will be able to contribute to government retirement programs. That fact alone makes incorporating a safer and better option.

When it Works, it Works

If you have the right communication and the right temperaments, starting a business could end up being the best possible choice for your marriage, your future and your financial outlook. Just be ready to jump those hurdles together.

Navigating the financial aspects of starting a small business can be perplexing at times. Taxes, in particular, require proper management. Otherwise, you could find yourself having not-so-pleasant conversations with the IRS. The best way to avoid these conversations and safeguard your small or online business is to make sure you have a proper understanding of the laws and processes involved in administering sales tax.

How Sales Tax Works

Unlike some taxes, sales tax is not federally mandated, but rather is handled on the state level. All but six U.S. states currently require vendors to charge sales tax, and even in states without such laws, there may be local requirements that vary between municipalities. For this reason, researching tax-related laws in your area is an important first step in starting your small business. If your plans include an online business, you will need to be prepared to account for all variations of sales tax.

A few types of small businesses are exempt from charging these taxes, although again, some areas may have their own specific ordinances. Unless you produce raw materials, sell on the wholesale level or do business specifically with nonprofits, it is likely you will have to deal with sales tax in some fashion.

Permits and How They apply to an Online Business

Most states require that you obtain a permit before collecting sales tax. If you are starting an online business, though, don’t worry. You are only required to obtain permits for taxes charged to customers in the state where you are physically located.

For example, if you sell nationwide but only have one office located in Oklahoma, you only need to collect sales tax on purchases made by Oklahoma residents. If, however, you were to open a second physical location in Texas, sales tax would then extend to Texas residents, even if the specific item they order ships from your Oklahoma location.

Note that the rate of sales tax is determined by the state from which the order originated, so Oklahoma customers of your online business will pay the going rate in their state, while customers from Texas will be taxed according to Texas laws.

Protect Your Small Business with Proper Filing Procedures

Once you’ve determined applicable tax rates and obtained the necessary permits for your small or online business, your remaining concern is how to file and pay those taxes. Whereas tax filings for individuals generally take place once a year, most small businesses are required to file and pay sales taxes each quarter, although some states will require your small business to pay its sales tax monthly.

Be prepared not only to report sales for which you collected taxes, but also any other sale you have made, including those made to nonprofits or other exempt entities.

Taxes for small businesses really aren’t as complicated as they seem at first glance, especially if you are operating a storefront from a single location. If yours is an online business, circumstances may be a bit more complex, but as long as you are aware of the laws in the states in which you operate, obtain the proper permits, and file at the correct intervals, your business will be on the road to success — and the right side of the IRS.

Many of the reasons you decided to start a home business are apparent: you can set your own schedule, work in your comfort zone and save yourself the cost of renting office space.

Another benefit that should not be discounted, however, is the ability to deduct many of your expenses. Be careful of going overboard with these deductions, lest you find yourself on the wrong side of the IRS.

At the same time, though, knowing the common home office tax deductions can help you preserve your small business budget.

1.            Utilities

This will include a percentage of your utilities, based on how much of your home is used exclusively for business. Exclusive is the key word here. Part of the dwelling must be set aside for business use only, so working on a laptop at your kitchen table does not qualify.

2.            Household Repairs

If your business involves customers or clients regularly visiting your home, you may deduct a portion of household repair and maintenance costs as a small business expense.

3.            Rent and Mortgage

Both homeowners and renters can take advantage of these deductions, provided at least one room in the dwelling is set aside for the home business.

4.            Insurance

According to the IRS, if your home is your “principal place of business,” a portion of your homeowner’s or renters insurance cost is deductible as a home business expense.

5.           Your Car

If you use your personal automobile to travel to business meetings or make deliveries, the cost of upkeep, insurance and gas can be deducted. Be aware, however, that if the automobile is also used for non-business purposes, you will need to track your business-specific mileage, and only that percentage is deductible.

The importance of providing true and valid usage of your home and automobile for small business purposes cannot be overstated. IRS audits can and do happen, and should you find yourself on the receiving end of one of these, the auditor will expect to enter your home and see proof that you have a least one room dedicated to your home business.

As long as you are honest, however, you can successfully save a portion of your small business budget by using the appropriate tax deductions.

Now that we’re into the New Year, it’s time to think about your tax strategy for 2010. And this could be one of the craziest years to try and plan a workable strategy – but no matter what Congress does, you can take some useful precautions to minimize the impact of your tax bill on the bottom line.

One highlight of this year – the estate tax is supposed to go to 0% for this year. President Obama though is opposed to this move and is pushing for the rates to be set to levels comparable to recent years.

The American Recovery and Reinvestment Act provided some great tax breaks for small businesses in 2009 such as larger first-year and bonus depreciation tax write-offs. Expect some of these to be extended into 2010.

Bonnie Lee, a tax expert with Entrepreneur.com says “who knows what’s going to happen” but added that taxes are likely to rise, especially if the proposed healthcare legislation passes.

In spite of the uncertainty, Lee suggests a few prudent steps you can take to minimize your tax bill. These include:

• Do what you can to reduce taxable income – contribute to a health savings account or make charitable donations. Contribute the maximum allowance into your IRA or 401k.
• Develop better strategies to track your expenses. Buy a mileage log and develop company-wide strategies to track all expenses. You’ll need all the deductions you can get.
• As stay on top of all the changes that go on from year to year so if you haven’t used one in the past, consider hiring one.
• Set aside money each month for your tax bill that will be due in 2011. You can probably bet your 2010 taxes will be higher than 2009 so be prepared.

Taxes for small businesses are unfortunately a fact of life so we need to stay proactive so we don’t end up paying more than we should.

Learn more about some of the federal taxes small businesses are subject to in our online incorporation knowledge center article on the subject. And if you’re thinking about making the switch to entrepreneurship in 2010, consider incorporating your small business online with MaxFilings.