Paying taxes is unavoidable. However, minimizing tax liability is your choice. By taking advantage of the many tax deduction options available for small business owners, you can significantly reduce your tax burden. Knowing a few home business tax tips will help you save some of your hard-earned money.
Record keeping: Small business owners often ignore keeping an organized record of all business-related expenses incurred throughout the year. This is essential to make use of tax deductions on expenses related to running your business.
In the event of an audit by IRS, only deductions that can be backed up by relevant documents are accepted. Ensure that you save all the receipts and bills for a period of at least seven years. Also, it is prudent not to mix personal and business expenditures when you run a home business.
Know your deductions: If you run a home business, you can deduct certain costs associated with the maintenance of your home from your taxes. However, only the maintenance costs for the specific area that is used as home office is eligible for legal deduction.
Some of the expenses that qualify for this deduction include mortgage/rent payments, property tax payments, utility bills, and home insurance premiums. Additionally, a small business owner can deduct any cost related to the business from the tax. This covers a whole gamut of expenses from equipment purchase and maintenance to telephone and fuel bills to advertisement and entertainment expenses.
Small business owners can claim deductions on the costs of purchase and maintenance of computers, domain name registration and hosting, software, internet service, magazine subscriptions, and office supplies, provided these are exclusively used for your business. You can keep a log of your mileage when you use your car for business travel, even if it is for visiting a post office or library for business purposes. This can be later deducted as a travel expense at the prevailing rates.
Health insurance is another expense that qualifies for tax deduction. If you are the sole proprietor, health insurance premiums for yourself are tax deductible, whereas if you have employees, premiums paid by you for their health insurance also become eligible for deduction. A small business owner can indirectly save on taxes by employing their family members, as they pay less tax on their income and you can keep the money in the family itself.
Pay tax on time: An important tax tip for a small business owner is to pay tax on time rather than putting it off. Avoidance of tax payment will result in paying the entire tax amount plus interest and fine on that amount.
As a home business owner, you are required to pay taxes quarterly. An estimated amount has to be paid every three months, failing of which will attract penalty. When you file your returns at the end of the year, pay up any deficiency, if you have paid less, or get a refund, if you have paid more.
File your returns: Paying tax is not enough to avoid coming under the radar of IRS. You have to file your returns for the previous year by April 15. In case you are not ready with the necessary paper work, you can get a six-month extension by submitting Form 4868. This is only an extension to file returns. Tax dues have to be paid by April 15.
Tax laws keep changing every year, bringing in new deductions and making some older ones obsolete. While a small business owner is advised to keep up-to-date with tax laws, services of a professional tax preparer can be utilized for exact calculation of taxes and preparation of returns. The cost of such services will be recovered from the money you save by paying less tax.