As Benjamin Franklin, one of the founding fathers of America, says, there are two things certain in life; death and taxes. He is the same guy you see on a hundred US dollar bill so we should heed the guy’s advice and look out for the taxes. While running a business, you think you have all your bases covered. You are expecting a good profit and then suddenly you receive a tax notice out of nowhere. That’s when all your plans fumble in an already bumpy business. All your profit projections suffer and with it almost everything that you have planned in your life. This happens because tax laws can sometimes be confusing, and if the laws change, the confusion is compounded, resulting in giving you an additional headache. It is usually very difficult to give you an idea about the impact of the changed law on your business, consequently resulting in a tax surprise. Avoiding tax surprises is necessary for small business owners as they usually have a running loan that they have to pay every year. In case of such a surprise, one can suffer, resulting in a massive revamp in business and profit projections for the next year. Well, you would not want to be that guy now, would you?
The D-day for taxes in the US is 15 April as one must always remember. So, if any tax surprise has to occur, it will be on or after this date for which necessary preparations can be made. As a rule of thumb, one must keep track of an online service for small business loans to deal with any fallout from the surprise. But, our first and foremost priority is to be able to avoid such surprises. According to a study, 14 per cent of the small business owner said that tax was the biggest problem they had to deal with. Hence it is imperative to set some guidelines to reduce its impact on small businesses. In this article, we will discuss in detail some of the things and habits you must acquire for evading these surprises. So, the earlier you start acting upon these tips, the better for you.
Documentation and Bookkeeping
It goes without saying that you must keep a record of everything you do in life, especially when it involves a lot of money. This is generally a very good habit that many successful people try to follow even for their personal expenses so they can avoid any unhealthy spending in the future. In the case of small businesses that are already relying most of the time on loan money, it is indispensable to keep track of all your expenditures, income and overall budget. Bookkeeping is in itself a vocation in which experts keep the records of all the transactions done by a business for future reference. There are also some software options available like Quickbook. Small businesses are usually budget-constrained and sometimes cannot simply afford to hire anyone and rather rely on software that the business owner personally manages. However, it is recommended to hire someone for this job as it can be time-consuming for you and divert your attention from the other parts of the business.
This way, you can not only keep track of all your expenses and loans but also make projections of how much more needs to spend on a monthly and quarterly basis to achieve goals. While it comes with the obvious advantage of avoiding misuse of any funds by your employees, you can also determine how much will be deducted as tax. Keeping hard copies of invoices and receipts can sometimes take too much space physically. Bookkeeping also gives you an option to keep their digital copies or both as per requirements.
Claim your home office deduction
Many small businesses simply cannot afford to rent space and hence have to work from home. IRS gives a certain leeway to people who run their businesses from homes, consequently saving a lot of money that can be cut in tax. Research has shown that during tax filings, there can be a discrepancy of almost 20 per cent between eligible filers and those who avail the offer. There is a criterion of exclusivity for places to qualify as a home office. So, if you declare a place as a home office, it cannot be used for any other purposes and the IRS makes sure of it before making you eligible. Hence, it is important to consult your accountant to see if you can take advantage of a home office deduction and reduce your tax expenses considerably.
Apart from home office deduction, you can also file for other deductions like healthcare, charity, energy credits, etc. This will also considerably reduce the amount of tax you have to pay. Applying for these deductions is only possible if you keep track of all your expenses which takes us back to the point of bookkeeping and documentation. Your accountant is the person who can better guide you about how to leverage these deductions to reduce your tax surprises every spring. There are also many other industry-specific deductions that you can dig up depending on your own business while seeking help from your accountant.
Remember, any mistake you make while taking care of your deductions translates into an increase in the tax bill. So avoiding them is one of the biggest and most important steps in reducing your tax surprises. One of the biggest mistakes that businesses make in the US is not keeping an eye out for local taxes of each state. Many states impose several taxes like property, income, sales and use tax. And even inside each of these taxes are several categories which you have to consider. Taxes also vary from state to state, so this variation and lack of awareness can be one of the biggest reasons for tax mistakes.
Another most typical mistake the businesses do is to wait until the end of the year to figure out their taxes. When everything happens in a hassle, mistakes are one of the possible outcomes resulting in increased taxes. This is why working proactively throughout the year is recommended to minimize the tax at the end of the year.
Filing an extension
Life is not always perfect, and even after following all the necessary precautions and guidelines, one can mess up their tax numbers. So instead of rushing to file tax, one can always file for an extension to buy some more time to figure out your numbers. However, this should always be used as a last option when nothing else is possible.
In a nutshell
We all know that taxes go hand in hand with businesses. Whenever you decide to earn some money, the government would always want their share and why would not they? Running a country requires money. But you can always reduce the amount of taxes you pay to the government if you are smart enough. Well, we are not talking about tax evasion, which is definitely illegal but about the tax leeway that is allowed within the law. In short, keeping your records, looking out for deductions and working with your accountant can go a long way in saving a lot of your money. And if you somehow still are not able to manage it, you can file for an extension to buy some time. But I would personally recommend filing your taxes as early as possible to get the burden off your back.