Though tax time scares many home business owners, you can limit hustle by keeping good records, knowing tax terms, and taking advantage of deductibles.
Tax time can be a frustrating time for home business owners. A home business can help you benefit from several tax breaks and deductions. However, if you are not organized, managing taxes for your home business can cause you headaches and great anxiety.
Some people also claim that you will attract IRS auditors to your business if you aggressively claim tax breaks or write-offs. Nevertheless, home business owners still need to file taxes and grow their ventures to achieve financial stability. Filing taxes is the second most important task for small businesses. So, how can you make tax issues less stressful? This article provides you with 10 practical tax tips for home business owners.
How taxes affect your business
Every home business owner in the United States must pay taxes. Though the tax figures differ in structure and amount, taxes are one of the major costs linked to running your business. In the United States, an average home business owner pays a 19.8% tax rate on their income.
Taxes are also important bills your business must pay. Failure to pay, late payment, or inaccurate filling could lead to criminal prosecution. The best thing is to benefit from the following tax tips to make your taxation process smooth and less costly.
Tip 1: Master the financial jargon
If you want to succeed in handling your tax return, you need to familiarize yourself with specialized accounting terminology. Why not learn these terms to help you understand your financial position. Some terminologies you may see on your financial statements include:
- Revenue- the money earned from product sales
- Cost of goods sold (COGS)- the cumulative cost of producing and selling your products.
- Gross profit- the money you are left with after subtracting COGS from total revenue.
- Net sales- the resulting amount after deducting expenses from gross profit.
Tip 2: Keep an updated record.
Some home business owners dread being audited, but your business can survive it. However, if you do not have accurate records to back your deductions, being audited can be a nightmare. You can avoid this outcome by keeping an accurate record of your home business activities.
Some business activities like purchasing stationery, phone calls, mileage, and other costs may go unrecorded, but that can cause problems when filing returns. The best way is to keep a digital log of all receipts. You also want to record all income received by your home business for easy computation.
With a detailed accounting record, you will face the auditors confidently. Keeping daily or weekly records will also reduce your time getting your taxes right. It will also allow you to know how your business is doing every month and take corrective measures to promote sustainability and growth.
Tip 3: Hire a qualified accounting personnel
As a home business owner, you may not have the needed accounting knowledge to handle tax returns. You could hire a professional (enrolled agent or a CPA) to help you sort your home business taxes.
Be careful not to fall for bookkeepers who claim they can prepare your taxes. While bookkeepers know how to record income and expenses, handling tax returns is above their league. You will need the services of CPAs (licensed by states) or enrolled agents (licensed by IRS) since they have the academic qualifications and experience to handle taxes.
You may need an expert to look at your taxes because running a business is involved. If you are worried about paying a tax professional, know that they will likely pay themselves using tax savings. Whatever the case, your home business is safe in the hands of a tax pro.
Tip 4: Claim home office expense
Most home businesses can be operated in a dedicated room at your house. You can write off the shared room and deduct it as the cost of running a qualified home office. The qualified space can be calculated as a percentage of the apartment area, but the claim does not include unrelated expenses like installing a bird fountain in your backyard.
Your home office can qualify for deduction after meeting the following criteria:
- The space must be used only for your home business operations. You can double the room as a dining or guest room.
- The office is used to manage or administer or manage the business, and the home business owner does not conduct administrative functions anywhere else.
- The home business owner meets their customers here.
- Business inventory is stored in that room.
Tip 5: Upgrade your Office equipment
If you incur office furniture, computers, equipment, and software costs, you qualify for a 100% deduction in the year for the business incurred. However, the equipment or purchase should be used primarily for business purposes.
Tip 6: Contribute to your retirement
If you are a solopreneur, you can pay for employer social security and insurance but deduct half the total premium or social security for you and your employees. Small business owners also have retirement plans, and they can prepare by contributing their own 401 (k). The contribution you make for yourself and your employees is tax-deductible, helping to lower the tax obligation.
Tip 7: Make charitable donations
You can also minimize your tax obligation by donating cash to support non-profit organizations or a community cause. However, these contributions have limits on the amount to donate in the tax year:
- An individual can write off 100% of taxable income upon donating
- Corporations can only write off 25% of their taxable income upon donations.
Making charitable donations is a double-edged sword, helping you save on tax and identify with the target audience. Statistics show that customers are four times more likely to buy from a business with strong reputation and brand values. You will improve your home business brand value by supporting a local cause.
Tip 8: Take advantage of section 179
If you have purchased expensive equipment or upgraded your security cameras or lighting system, you can use section 179 to write off the entire purchase price to reduce the tax liability. However, you should remember that the equipment must be dedicated to the business more than 50% of the time during the current financial year for the deduction to apply.
Tip 9: Claim the 199A
Beginning 2018 to 2025, taxpayers have a provision to reduce their taxable income using a qualified business income (QBI) deduction. This amount is equivalent to 20% of income attributed to your returns form partnerships, S-corp, or sole proprietorship. However, the income deduction does not apply to joint taxpayers whose taxable income is less than the yearly stipulated figure ($340,100 in 2022) and individual taxpayers with taxable income below $170,050.
Tip 10: Buy or build a business building.
If you are running your home business from a third party, you can benefit from tax deductions when you build or buy a business building. Business premises are awesome tax shelters since you can deduct the building’s expense while its value appreciates. Building rarely depreciates, meaning you are lowering taxable income by appreciating your building’s value.
The Bottom Line
Many home business owners hate tax periods; however, the pressure and scrutiny associated with taxation can be minimized if you prepare in advance. Keep an accurate record of your business activities, even minor ones. Take advantage of tax deductions available for your home business to reduce your tax liability. If you play your cards right, you will cushion your home business against harsh taxation rules and see your business pick up. Which tax tips have you utilized for your home business?