Operating and owning a small business can be burdensome. Businessmen were struggling to survive having small profits and while striving for market share, which is why each centavo of their income is very important. Moreover, if we are paying taxes more than what we should, having these businesses will be more costly.
Nearly 93% of the respondents of the survey made by Garrett Gunderson for Forbes states that for the past 12 years they overpaid their taxes. Gunderson is a personal finance expert and the respondents of the survey are his small business-owner clients. Nowadays, businessmen are more focused on how to keep their business running rather than being a good tax payer. It is very necessary for us to learn in which area we can save money for us to be able to reinvest the said savings to our business in order for it to grow.
As 2020 is fast approaching we need to take into consideration the following tax saving tips.
1. Using tax filing software
This is highly advisable not just for small business owners who are concerned in preventing problems but also for entrepreneurs who are knowledgeable on taxes. These tax filing software provides protection to small business owners.
2. Pay your retirement now and get payoff later
Taxable income of those self-employed workers can be decreased by contributing extra money to a traditional retirement account. Retirement funds will only be taxed upon withdrawal. Depending on the age bracket, small businessmen can put up certain amounts to a traditional retirement savings or Roth IRA. Each business owners below 50years old are allowed to contribute a maximum of $5,500 while those above 50, they can contribute as much as $6500.
This tax initiative can be beneficial to our current and future financial status but before that we need to consult a financial advisor to determine the amount we are capable to contribute based on our cash flow.
3. Deduction of home office expenses
Typically, most small business owners run their offices at home. Many of them are not aware that they can use expenses relating to their home office like insurance, mortgage interest payments, repairs and even utilities such as internet. Tax software cannot determine which expenses is included, thus, we need to identify first which part of the home is used to run the business. Adding these expenses to deduct in the total taxable income will result in a reduced tax payable which can be beneficial to homeowners and renters.
4. Stop Ignoring Our Auto Expenses
Most of us are not aware that auto expenses can be a deduction when it was used in our business. One example is an employee who resigned from his job to start a business. In his first 2 months of running the business alone, he was able to trace that his mileage cost his business by 90%. By the end of the year, if the rate will be consistent he will be able to deduct thousands of dollars as he was using his car for his business.
The percentage of the cars mileage that is attributed in the business can be applied to our auto expenses for the whole year.
IRS established two methods in calculating this kind of deduction. The first method is to deduct the percentage of usage (that is tied up to the business) to the actual expenses. Second method is by tracing the actual mileage and get a tax deduction for every mile. Note that the rate per mile for 2018 is 54.5.
To illustrate this, let’s assume that driving a Range Rover in LA will cost us $1500 a month for the lease with a 10,000 miles driven a year, in which 80% of the total drive constitutes the driving for work. In a year, we will be spending a total of $18000 using actual expenses which include lease payments, gas and other maintenance. If we listed only the total lease for the whole year, the total tax deduction will be $14,400. While, if we are going to use the standard mileage rate deduction it will only give us $4360 in total.
On the other hand, there will be a different calculation for a Prius driver who has a payable of $200 a month and by using similar data of 10 000miles a year with 80% of the total is being used for business. If we use actual expenses method in this case, we will be able to deduct $1920 plus 80% of gas and maintenance. While using the second method which is the mileage deduction we will come up to nearly $4360.
Spending time tracking all these things is far better than working to earn the equivalent tax savings. As of now, there are applications that help us to easily track our mileage.
