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Small Business Advice Writers Need to Remember to Cover Taxes

September 9th, 2013 by

how to start a small businessWhen starting a small business, there are all sorts of things to learn, and most first-time business owners have probably gone through at least three or four different books on how to start a small business by the first month of operation. However, one aspect that is frequently missed and can have huge implications on the success of small business starting out is tax planning. Fortunately, understanding tax issues early on can help a small business make the right decisions, avoiding painful mistakes and audits later on when growth is needed the most.

Writers who advise small businesses need to pay attention to tax risks when providing tips. A bad and untimely tax audit is one of the top five causes of business bankruptcy before a company can get its legs fully off the ground and running.

Every Expense Matters

The first thing to remember is that every single expense matters and can be used to reduce a business’ taxes if the documentation and receipts are saved. Expenses are incurred every day for a business, and many of them are under $100 or $75. Just think, if $20 is spent on average every day of a business, 365 days in a year, that figure becomes $7,300 in deductible expenses. Keeping a copy and scanning every receipt ensures a solid documentation trail come tax return time.

However, it’s not enough to just have expenses. A business has to save the receipts and base tax reports and deductions on those receipts. Setting up a system early to track the business accounting is critical to be successful at this task. Unfortunately, a full paper approach can be tedious and prone to mistakes. Fortunately, there are some really good business accounting software packages available for low cost that any small business can use from day one. And many are very intuitive and easy to learn.

Don’t Mix Equipment and General Expenses

Major equipment usually has to be depreciated over time, which means only part of the cost can be claimed each tax return. This period usually covers anywhere from three to ten years, depending on the equipment involved. Claiming all of an equipment cost up front in one year can frequently trigger an audit and an expensive tax payment correction. Fortunately, this mistake is entirely avoidable by knowing the difference on which costs are equipment-related.

Don’t Mix Personal and Business Money

Small businesses owners often work literally out of their own wallet in the first few months, trying to get a company going. But not separating accounting from personal spending can be headache later on when the IRS wants proof which costs were truly for a business. By starting with a separate bank account and credit card account for a business, a lot of explanation headaches can be avoided. A full separation makes it far easier to show clean books entirely associated with a business versus anything else.

Keep Business Gifts Reasonable

Small business owner often behave in extremes, at first not thinking about taxes and then later trying to claim everything willy-nilly. Both approaches can get a company in trouble with the IRS. Gift-giving occurs in a business and can be claimed, but solid reason is expected. A small business that gives thousands of dollars more than it brings in doesn’t make sense; it becomes a big red target for an audit. Use common sense and avoid uncomfortable questions.

In Summary

There’s plenty of more tax code that exists, which is why tax lawyers remain gainfully employed, but small businesses can’t afford them and often rely on advice writers and articles to answer startup questions. Making sure to provide all the critical information versus just sales and product generation can help entrepreneurs tremendously.

Tom L is a freelance writer available on WriterAccess, a marketplace where clients and expert writers connect for assignments.

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