Updated: Feb 5, 2019
You don’t have to be an accountant or tax attorney to start or run a business (phew!). But knowing some tax basics could save you a lot of money. Even if you’re not doing anything “wrong” today, there could be different ways to run your business or organize your finances that help minimize how much you have to pay Uncle Sam.
Whether you’re in your first year of business or are a veteran of your trade, a tax professional who has experience in your industry could help you optimize your business and give you ideas for minimizing taxes as you grow.
“If you’re going to have a business, you’re going to want to make sure everything is in its proper place,” says Keith Schroeder, who runs an accounting firm and writes at The Wealthy Accountant. He considers not working with a tax professional one of the top mistakes small business owners make.
Even if you enjoy learning about taxes and want to be in complete control of all aspects of your business, you may want to occasionally check in with an expert — and now might be the right time. The Tax Cuts and Jobs Act of 2017 (TCJA) led to several major changes that can impact small business’ taxes, and an expert could help you navigate the new landscape.
You may be able to choose what type of business entity you want to use when you form a company. For example, you could form a limited liability company (LLC), S corporation, or C corporation. If you don’t incorporate, you could still run your business as a sole proprietor.
Richard M Prinzi, Jr., CEO of F-Sharp Tax Management Services, says entity choice is the biggest problem he regularly deals with when working with business clients. Some may be set up as a single-member LLC, but they need to be an S corp, says Prinzi.
Luckily, you may be able to change your business’ structure even if you’ve already been in business for years.
Each entity type could have a different impact on your business and individual taxes, so you may want to compare (or have a tax professional help you compare) the net impact on your total tax obligation.
If you’ve already incorporated, you may be required to have separate business accounts. However, even when mingling accounts isn’t technically against the rules, it’s still often a bad idea.
You may be able to look over last month’s bank account or credit card statement and figure out which expenses were for your business and which were for personal use. However, imagine having to figure it all out the next time you file your tax return — there’s a good chance you’ll lose track of things and miss deductions. Or, even worse, imagine having to provide proof of your business expenses several years from now when you’re faced with an audit. You might wind up paying penalties and interest.
It’s generally best to keep your business and personal finances completely separate by opening bank accounts and credit cards that you use solely for business purposes. Plus, your accountant will thank you (and you may save money on tax preparation) if your expenses are already somewhat organized.
For businesses with a lot of expenses, hiring a full-time bookkeeper or outsourcing the work to a professional could be a good idea. Prinzi says if you’re only handing the numbers over to an accountant at tax time, the accountant might make sure everything is correct on your tax return, but that’s it. An accountant with more frequent access to your books might be able to suggest options for lowering your taxes.
Smaller or simpler businesses might not have enough work to justify the cost of hiring an accountant, but good accounting software can make your life easier and help you save money.
Some programs, such as Quickbooks Self-Employed, Xero, and Freshbooks can connect to your bank accounts, allowing you to easily record and categorize each of your expenses. They may even have mobile apps you can use to take pictures of receipts that can then be stored alongside the expense.
If you don’t have a good system in place, you might misrecord or completely miss out on deductible business expenses, which brings us to the next mistake…
Prinzi says many business owners don’t realize what’s deductible because they’ve only had experience with their individual tax returns. There might be a lot more leeway with what a business can purchase and deduct. “If a company is willing to pay for it, even if you are the company, then it might be okay,” says Prinzi.
Generally, an expense is deductible if it’s ordinary and necessary for your business. That could include a long list of products and services. Advertising, rent for your office space, fees for business licenses, legal fees, and interest on business debt may all be deductible. You may also be able to open a retirement plan, and the employer contributions could be a business expense.
Some business owners might not report all their income, particularly when they receive cash for their products or services. No judgment — but, as you likely already know, you should report all your income. You may have to pay more taxes now, but it could save you money on the penalties and interest you might have to pay if you’re audited later.
As an added benefit, having more business income could help you qualify for financing if you ever need to take out a loan to run or grow your business. A higher income might also allow you to command a better price if you want to sell your business.
It can be tempting to stop making payroll tax payments if you’re faced with a cash flow crunch. But that could be a serious mistake with real financial consequences.
“Besides levying the business bank account and conducting asset seizures, when a business fails to pay trust fund taxes [i.e. payroll taxes], the IRS can come after the business owner, too,” says Michael Raanan, an enrolled agent and president of Landmark Tax Group. “Having a Corporation or LLC might not protect you from the IRS in this situation.”
Small business owners may be required to pay estimated taxes throughout the year if they expect to owe at least $1,000 in federal income tax for the year. Underpay, or miss an estimated tax payment, and you could have to pay penalties plus interest.
Depending on where you live, you may have to pay estimated state income taxes as well. Fortunately, you may be able to make both federal and state estimated tax payments online.
Filing your annual tax return on time can help you avoid a penalty and save you money. You should do this even if you can’t afford to pay your taxes (here’s what to do in that scenario). You may still have to pay penalties and interest for paying your taxes late, but at least you’ll minimize how much extra you owe.
If you’re scrambling to get your paperwork together, but don’t think it’s possible, you may also be able to avoid a late filing penalty by asking for an extension.
As tax laws change, what’s best for your business and personal situation may change as well. It can be difficult to stay informed about every small update, but being aware of the major developments could help you avoid costly mistakes in the future.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.