One of the least pleasant aspects of running a home-based business is dealing with taxes. However, given the fact that it is an unavoidable part of your activities, you should learn how to do this in a timely manner and learn to take advantage of all legal deductions and exemptions allowed for small businesses.
If you feel that you are not good at keeping your accounting and bank records, including various expenses or excluding them from your business tax return, rest assured that you are not alone in this. In fact, many home-based business owners commit a series of tax mistakes on a continuous basis. Some of these mistakes deprive them from legally allowed exemptions. Others, however, cost them money, by failing to comply with all legal regulations.
Since our goal is to be of assistance to all budding entrepreneurs, we will present the biggest tax mistakes, which small business owners are most likely to make. By avoiding them, you will clear a lot of various future tax problems and save money, too.
1. Not Keeping a Separate Bank Account for Your Business
When you open a small home-based business, you should open a bank account in the name of your business, through which you will run all transactions which pertain to your business. This is extremely useful when preparing your tax return, because when you list your expenses for deductions, you should not include any item which clearly has no connection with your business.
For example, if you do not make a careful separation of all your expenses, the IRS will receive a tax return for your internet home-based business which includes pet food and your weekend to the beach as deductible expenses. And this will raise a red flag and possibly lead to an audit to ascertain how you keep your accounting records.
2. Not Deducting Home and Utilities Expenses Related to Your Business
Since you are running a home-based business, your house is your registered headquarters. This means that you can deduct various expenses, such as internet, telephone and internet bills, and even a part of your mortgage rate. In order to do so, you need to designate a specific room as your home office and keep all business related equipment and supplies in there.
This means that you need to have a phone and a computer which are used exclusively for doing business and not for personal reasons. If you do not make this clear delimitation of use, the IRS may ask questions about the deductions included in your tax return.
3. Not Filing for Deductions for Your Start-Up Costs
Most business owners know that their initial costs for setting up the business are deductible AFTER they concluded their first sale. However, if these start-up cost are within the threshold amount of $50,000, you are eligible to deduct $5,000 for the supplies and equipment, and a further $5,000 in organizational costs (such as the costs for incorporating your business, legal fees, etc.). These deductions can be claimed during the first year of opening your business, even if you don’t close a single sale.
4. Not Choosing the Right Business Structure
Most newbie entrepreneurs will go ahead and register their business as a C Corporation – which makes them liable to double taxation: for their personal income and for their business revenues. The correct form of incorporating a small home-based business is as a S Corp, which means that you will file only one tax return, including all your incomes and those of your home-based business, and pay only one set of taxes.
5. Getting Behind with Tax Payments
If you are overwhelmed by personal and business expenses, do whatever you can to include your taxes on the list of things to pay before the due date. The IRS charges a penalty between 0.5% and 1% per month of delay, which is automatically calculated whenever you file your tax return but do not pay on time.
If you feel that you are unable to pay the full amount on time, get in touch with the IRS and apply for a payment plan in installments. Getting behind with your taxes will also hurt your chances to grow your home-based business into a larger company, because you will have a bad credit score and will find it difficult to obtain bank loans for your business.