Tax tips for your new business
Starting a new business can be an exciting endeavor, but preparation and record keeping and tax planning can make or break a new business. Small business owners are one of the most heavily targeted for audit by the IRS so this guide will help guide you through what receipts and records you will need to both prepare your tax return and protect yourself in an audit.
The money you make from your business before any expenses are factored in is your gross income.
In order to track your income you will want to save copies of all paid invoices and sales receipts you generate when doing business with your customers. If you work as an independent contractor it is important to keep track of your income even though you may receive a 1099 for your work, this way you can make sure the income reported is correct. If a 1099 is not issued to you for any work you did it is your responsibility to make sure you report all income to the IRS.
Many expenses are specific to the type of business you are running. But many of these will fall under general business expenses. Here are some examples of general business expenses:
- Commissions and Fees paid
- Business insurance
- Legal and professional fees
- Office expenses
- General supplies needed for your business
- Repairs/maintinence expenses
- Travel expenses
To track expenses you will need to keep receipts and invoices to prove these expenses. If you use bookkeeping software or a spread sheet to track your expenses it is helpful to input your expenses soon after they happen or make sure to write notes on your receipts reminding you of what it was for and what kind of expense it was. If you try to add it all up during tax season you will find yourself unable to remember what certain receipts were for and why they were deductible which can cause problems later in the event of an audit.
Car expenses and Mileage deduction
For car expenses the IRS will let you deduct the actual expenses of driving your car for your business or they will let you deduct the standard mileage rate. Either way the IRS requires a detailed mileage log. This includes the date of travel, the destination, the business purpose, the starting and ending odometer reading and the total miles. Usually the most beneficial is to take the standard mileage deduction, if you want to claim actual expenses you will need a mileage log in addition to all your fuel and maintenance receipts and you will need to know your starting and ending odometer for the year to figure total mileage. This is because the IRS lets you take the expense based on the percentage you used your car for business so you would take business miles and divide them by the total mileage driven for the year to get the business use percentage. This is a lot of extra work that may or may not pay off.
Home office expense
If you have a home office there are some things you should know about taking the home office expense deduction. The IRS requires a home office to be separate room in your home that is 100% business use only. It also cannot be a shared space or used for anything else. If your home office meets this requirement you may take the deduction.
To figure out how much can be included as an expense you will need to know the total square footage of the home and then the total square footage of the home office.
If you use your home as a childcare or other care facility other rules apply and the calculation of household expenses is figured by number of hours used in your business. You can get more information on this by calling your tax preparer or going to www.irs.gov and searching for Publication 587 Business Use of Your Home.
Cost of goods sold
In businesses such as retail, wholesale and manufacturing you will need to figure out the cost of goods sold. This consists of 3 different numbers.
The beginning inventory, if this is a brand new business this number will generally be $0, but in subsequent years this number will equal the total cost of the parts or merchandise in your inventory at the beginning of the new year.
The next number you will need to have is the cost of your total purchases throughout the year. This can be actual merchandise, or it can also be parts and labor expenses associated with manufacturing items you sell.
At the end of the year, you will need to figure out the cost of what is left in inventory at the end of the year.
Remember these numbers will all be the actual costs, not the retail price you are selling the items for.
(Beginning inventory)+(Total new purchases)-(Ending inventory)=(Costs of goods sold)
You can only deduct the cost of items you have sold, anything left in inventory will be carried forward to the following year and can be deducted in the year it is sold.
One easy way to keep track of the income and expenses of your business is to use bookkeeping software and regularly recording your income and expenses, this way at the beginning of the year during tax season you can print out a page or two that contains all the expense and income information needed to complete your taxes.
Another good way to manage your books is to hire a bookkeeper to manage them for you. This is a great way to reduce the time you spend on this important aspect of your business freeing you up to manage the many other jobs that go into running your own business.
This by no means is a complete guide but it should give you an idea of the basic items you will need to keep track of when running a new business. If you would like to sit down for a new business consultation with one of our tax preparers or if you would like to use our bookkeeping service feel free to contact us at 541-689-7071 or by email at Info@abtscorp.com.