Entrepreneurship is the business of setting up a business, or in simpler terms, business squared. I personally like the term because it has mixed connotations of reward, complexity and responsibility which perfectly capture the very essence of entrepreneurship.
Before we begin, it is essential to realize that mistakes are part and parcel of every great thing in the making and there is absolutely no way around them. However, the trouble with financial mistakes is that they NEVER fail to cost you before teaching you a lesson, and that’s exactly why you hate to make them. Here we will review some of the biggest and most common tax mistakes made by entrepreneurs all the time.
It’s one of those initial mistakes every new small business owner in the block is set to make. Back in the time, when you were an employee, you didn’t think twice about the taxes. Now that you have set yourself a business, self-employment tax is something to save for. Just in case you are not aware, you now owe an entire 15.3% of your income to Uncle Sam under the pretext of Medicare and social security taxes! You should find a tax preparer to sort out the calculations for you.
If you are a traveling too much for business, here comes an easy yet significant deduction your way. According to IRS, the rates per mile driven for business, medical and charitable purposes are 54, 19 and 14 cents respectively. Logging these miles appropriately is a necessity before you can go on and claim your deduction. Although there are multiple apps available for logging these miles, your spiral notebook works just as fine, in case you are uncomfortable with technology.
If you have pivoted your office in your home, there are fortunately some additional deductions for you. The deductions, however, don’t apply if you already have an office and you still prefer to work at home or you share the office space and resources with your family because either way you don’t come up to the eligibility criteria set down by IRS for Home Office deduction, that:
Your home office should be in your “regular and exclusive” use
It should be your “principal space for conducting business”.
While calculating your home office deductions, IRS allows you to go for either of the two methods: Simplified and Regular. Each of the two methods has its own perks but you might want to work with a tax preparer to determine which works best for you.
Setting up an appropriate corporate structure for your company is pivotal but it requires you to make clear for yourself some key factors the decision will ultimately depend upon. Asking yourself whether or not you will need liability protection and what your business goals and projected success is, is a good place to initiate the decision-making process. You can always find a tax professional to guide you further in this regard.
If you are taking a modest start, however, keep it simple and go for an LLC to keep your personal liability low. As your business grows, you can always change it to whatever makes the best business and financial sense to you.
A good business man keeps away from investing his time, money and energy in everything that does not eventually help his business in the long run. In his fierce focus however, he generally fails to incorporate the matter of maintaining proper financial records, and ends up in loss when the tax season arrives.
By not maintaining proper financial records, you may end up over-stating profits, missing legitimate deductions and not completing required paperwork, all of which may result in a big tax bill – penalties won’t be surprising either.
The issue of classification of workers as contractors or employees is a significant one. If your independent contractors are declared by the state to be your employees, you have a big penalty coming up. Reason being: they owed you unemployment insurance, overtime pay and minimum wage, none of which is a concern if your worker is merely a convenient, independent contractor.
Unfortunately, there are no strict rules for determining effectively a worker as a contractor or an employee. Plus, the regulations vary from state to state in this matter; however, one fact serves as a thumb rule. If it is not possible for you to operate without them, they are your employees, and not your average independent contractors. Kenneth M Perkins CPA/PFS in South Boston, Virginia can further guide you through the complexities in this regard.
Small business owners seem to be at an impression that they don’t need to collect sales tax on online purchases. However, in case your city, county or state has a sales tax, and you are selling to customers within your state, you are liable to collect and submit the sales tax.
Find a tax professional early in the year instead of scrambling for one when the deadlines are right on the head.
Never ever let your personal and business expenses mix. They never fail to get into some kind of mischief together.
Think futuristically. Plan and budget for the upcoming expenses ahead of time.
Review your profit and loss statement often enough to spot oddities in advance.
You can only deduct once your business is up and running, and not when you first open your business account. Also, there is a certain limit to the first year deductions on start-ups.
There are some additional deductions like Domestic Production Activities Deduction and Research Tax Credit. Also in case you export products or services, Interest Charge Domestic International Sales Corporation setup will help you cut the tax rate enormously. Seek the help of an accountant to discover if you can make use of these smart options.
For further information in this regard, please contact Kenneth M Perkins CPA/PFS in South Boston, Virginia.
Kenneth M Perkins CPA/PFS