Taxes are an expense that every business must take into consideration. Paying taxes is painful no matter where you live or what you do but many business owners do not pay enough attention to taxes. This can be detrimental to the business owner since your taxes can account for as much as a third of your income. Accounting for your losses and gains when it comes to taxes takes some common sense and you will find that you can significantly mitigate and reduce your taxes by learning as much as you can.
In American today, an individual making an average income, is facing a tax burden of as much as 30% to 35%. That is taking into account federal, social security, and unemployment taxes. If you also include sales taxes and/or state income taxes, depending on your state, the number can increase by 8% or more.
Congratulation to you because by having a business you can get as much as around $5,000 of tax free income, however this number can change from year to year. Here are some important things you can do to keep Uncle Sam happy and away from your front door.
Documentation is your greatest friend when it comes to taxes. Every time you record any documentation that has the potential of impacting your taxes you must included the four W’s.
Who – name of the person or place you are doing business with.
What – kind of business. Are you delivering a product or purchasing supplies or services for your business.
When – as in the full date
Where – provide an address.
Documentation must be legible and accurate, so when obtaining receipts on thermal paper, make sure that you make a copy. If you get audited and the print has faded, anything over $25 dollars must have an accompanying receipt so this is your warning, faded receipts are not acceptable.
You can record and store receipts physically or digitally. Smart cell phones are now common for most people and there are hundreds of applications to document business activity. Many of the applications available allow the user to take a picture of a receipt, business card or business location which is logged into a database for accurate tax recording. This information is easily downloaded to a spreadsheet and used for tax documentation. Additionally, many apps have built in capabilities of using GPS in a cell phone for tracking mileage.
When it comes to taxes, having too much documentation is better than not enough so your secret to success is to document every single thing.
On your short list should be driving mileage, office supplies, training classes and business meetings. If you have a business meeting the includes a meal, you can deduct 50% of the cost.
Other deductions can be a home office that is an area in your house that is used exclusively for business. The home office square footage can then be deducted out of your home’s square footage. The resulting percentage can be deducted as a business expense.
Depreciation is another tax credit since things break or lose value. Computers are notorious for losing value almost as soon as the purchase is completed. However, all office equipment depreciates which includes printers, scanners, fax machines and chairs.
If you had a business in 2012 and you missed a few things that you now realize can be deducted, know that you can deduct anything that is less than $25 without a receipt.
If you have just started a new business, check out the apps store for business expense tracking software and start using it so that when 2013 taxes come around you can rest easy.