The deadline for the 2018 tax year is fast approaching. Will you (and your startup) get the returns you deserve for next year?
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When you’re starting a business, the last thing you want to worry about is how much of your profit is going to taxes at the end of the year (or the end of the quarter). But paying taxes is a part of doing business. And while this task might not be the most glamorous part of entrepreneurship, it’s still necessary to understand.
That way, you can make smart financial decisions now, to save money later.
Across all industries, the average small business pays a tax rate of approximately 19.8 percent, according to tax professor Jean Murray. Below are several tips on how you can save the most money possible once taxes come due — if not for this year, then the next.
Here are seven tax breaks to keep in mind for 2019:
1. Write off the cost of inventory.
If you sell physical products (online or offline), you can write off the cost of all that inventory once it’s sold. This can end up being a big chunk of money saved since the cost of inventory is often a top contributor to business overhead. Remember, you only have to pay taxes on the profits of your business, not on all the revenue that your business generates.
Oh — and if you accept cryptocurrency as a form of payment for your products, don’t forget to report those profits as taxable income, as well. Kate Pate, at ZenLedger explains, “You must pay federal income tax on any gains realized upon the exchange of Bitcoin for U.S. dollars, euros, virtual currencies or other assets.”
2. Your home office can lead to savings.
Rather than buy expensive office space elsewhere, many startup entrepreneurs choose to work from home. And doing that won’t just save you money on the front-end, you can also write off the cost of your home office.
Basically, you’ll need to determine the square footage of your home office as a percentage of your home’s entire square footage. Then, you can write off that same percentage of mortgage or rent as a home office business expense.
As TurboTax advises, “The most exact way to figure this proportion is to measure the square footage devoted to your home office and find what percentage it is of the total area of your home. If the office measures 150 square feet, for example, and the total area of the house is 1,200 square feet, your business percentage would be 12.5 percent (150 ÷ 1,200).”
3. Utilities make a difference.
Just as you would claim your home office as a business expense, you can also claim a percentage of the associated utilities (electricity, water, plumbing).
Here’s As TurboTax explains, a home office that occupies 20 percent of the house lets you deduct 20 percent of your bills for utilities, homeowners insurance, repairs, maintenance and homeowners association fees.
4 Business insurance leads to tax breaks.
Don’t forget to write off any insurance costs that you have for your business. If you use a home office, then a portion of your house’s insurance could be tax deductible. And if you have a business in an industry which requires additional levels of coverage (malpractice coverage or liability coverage, for instance), you can write those premiums off as well.
It’s because of simple deductions like this that some experts posit that the average American could save up to 35 percent on taxes just by owning a small business.
5. Freelance costs can play a role.
As a startup entrepreneur, you’re likely paying freelancers to help take some work off your plate.
At the end of the year, though, don’t forget to send qualifying freelancers (those to whom you paid $600 or more during the tax year) a 1099-MISC so that you can write off those paychecks as a business expense and save some extra cash.
6. Don’t forget about work trips.
A portion of most of the money that you spend while traveling for work can be written off as a business expense — but this deduction largely depends on what, exactly, you’re writing off. Fifty percent of food purchased for business purposes, for instance, can be deducted from your taxable income. And the entire cost of plane tickets, gas or other transportation expenses can usually be deducted, as well.
But what qualifies as “business travel”? The IRS defines it as being away from your home for “substantially longer than an ordinary day’s work.” For example, you have to sleep away from home to qualify (i.e., you can’t deduct a day trip).
7. There are major S-corp advantages, too.
As a startup entrepreneur, you may find it tempting to take the path of least resistance and simply leave your business as a “sole proprietorship.” With that, though, you’re going to be paying double taxes on all your business’s income (since you’re self-employed and don’t own a corporation).
If your business pulls significant profit, however, you could save a lot of money by transitioning your company from a sole proprietorship to an S-corp. That way, you don’t have to pay double taxes on corporate income, only on what you actually pay yourself.
In a mock case-study, Gusto compared the taxable income of a sole proprietorship to that of a completely identical S-corp business, both driving the same revenue ($150,000 per year). The sole proprietorship ended the year with $100,000 in taxable income, while the S-corp ended the year with about $95,000 in taxable income. And the bigger your income gets, the larger that gap grows.
Entrepreneur contributor Tom Wheelwright explained it this way: “One of the biggest benefits of forming an S-corp versus remaining a self-employed contractor is asset protection. An S-corp also does not have a legal responsibility to pay taxes on its corporate income.”
So … you’re a business owner; you can’t afford to spend much time thinking about how to save money on your taxes; and you’re better off spending the time you have to growing your business and pleasing your customers.
But a little bit of forethought can go a long way when it comes to maximizing profits and minimizing the money you’re giving to the government. In that regard, the above seven tax breaks will get you off to a good start.