2. Separate your personal and business expenses
Opening a separate bank account for your business – even if you’re funding it yourself — can save you major headaches.
Here’s why: if the IRS has questions about your company’s taxes, they’ll want to see itemized records of your taxable income and expenses. You should be able to produce your small business bookkeeping, including bank account records, showing all cash inflows and outflows and receipts for any major purchases or expenses claimed.
Providing proof of your business expenses can be messy and time-consuming if you use your personal bank accounts to fund your business. A separate account makes this much simpler:
- Clear records of business income and expenses
- Easy-to-track tax deductions
- Less time spent organizing receipts
Not only can this help you track expenses more accurately, but it can also save you time when filing your taxes.
3. Complete year-end accounting before you do your taxes
Before you can tackle taxes, you need to know your numbers. Year-end accounting helps you understand exactly how much you made and spent. If it’s your first time, don’t worry. It’s simpler than it sounds.
Start by gathering all your income and expense records:
- Bank statements
- Invoices
- Receipts
- Payroll documents
Digital or paper works, just make sure you’ve got the full year covered. Once you have a clear picture of your business finances, you can strategically minimize your taxable income by claiming tax deductions.
Let’s look at some common ones that could save you money.
4. Understand which business tax deductions to take
Just like you can deduct things like mortgage interest on your personal income tax returns, your business expenses can lower your tax liability, too. The secret to maximizing these small business tax deductions? Keep tabs on everything your business spends.
Here are a few of the most common deductible business expenses, along with what you should track for tax purposes:
Cost of goods sold
If your business sells tangible goods, you can deduct certain costs at every stage. Track what you spend on buying inventory, storing it, manufacturing products, and getting them to customers. Even packaging materials and shipping supplies count.
Mileage tax deduction
The IRS gives you two ways to deduct vehicle expenses if you travel for any part of your business. You can either log your miles and take the standard mileage deduction (easiest) or tally actual expenses, like gas, repairs, and insurance (more complex but might save you more).
Start a mileage log now — you’ll thank yourself at tax time. Remember that commuting to your regular workplace doesn’t qualify for the mileage deduction, but client visits, supply runs, and business errands do.
If you use your vehicle regularly for business, commercial auto insurance may be required (and those premiums are tax-deductible, too). Your personal auto policy typically won’t cover you when driving for business purposes.
Home office tax deduction
If you work from home, you can turn your home office into a tax advantage. The home office deduction lets you deduct a portion of your housing expenses based on your office’s square footage, plus business-related costs like:
- Internet and phone service
- Computer software (including accounting and tax software)
- Office furniture and equipment
- Utilities (based on your office’s percentage of home space)
- Maintenance and repairs
Keep in mind that your space must be used regularly and exclusively for business (no claiming the kitchen table).
And here’s a pro tip: Check if your homeowner’s insurance covers business equipment. If not, you might need home business insurance, which is also tax-deductible.
Write off your business insurance premiums
Smart business owners know good insurance coverage is worth every penny, and the IRS agrees. With insurance premium deductions, you can typically deduct insurance you must have to operate your business, such as:
- General liability insurance: Protects your business if a customer gets hurt on your property or if you accidentally damage someone else’s property.
- Professional liability insurance: Can help cover you if a client claims your work caused them financial harm.
- Workers’ compensation insurance: Required in most states if you have employees, it can help take care of employee medical bills and lost wages if they get hurt on the job.
- Commercial auto insurance: Can help protect vehicles used for business purposes, whether it’s a delivery truck or your personal car used for business driving.
- Commercial property insurance: Can help cover your business space and what’s inside it (from computers and inventory to furniture and equipment).
- Tools and equipment insurance: This type of insurance can help protect your work tools and equipment whether they’re at your workplace, in transit or at a job site.
You can also deduct health insurance premiums as long as you’re paying for them yourself (not through a spouse’s plan or employer).
Employee payroll tax write-offs
If you’ve got employees on your payroll, here’s some good news: Almost every penny you spend on them is tax-deductible. This includes salaries, wages, bonuses, and other compensation.
Start-up costs
Getting your business off the ground isn’t cheap, but the IRS helps by letting you deduct up to $5,000 in start-up costs your first year.
You can write off everything from market research and employee training to equipment and office supplies. Even expenses like legal fees, accounting services, and business licenses can be deducted.
As you are starting your business, keep receipts for any business purchases (even if you made purchases before officially opening your doors).
5. Decide if you should pay taxes quarterly or annually
If you’re paying your small business taxes for the first time, the bottom line can hit you hard. That’s because, at a traditional W-2 job, your paycheck withheld money for things like Medicare and Social Security taxes, and your employer covered some of the taxes for you.
When you’re self-employed, you’re handling both sides of the tax equation by paying the taxes of an employee and employer.
That’s why paying taxes quarterly rather than annually is recommended. In fact, the IRS can require you to pay taxes quarterly in some cases. Plus, making periodic tax payments helps you manage cash flow and stay strategic about tax deductions throughout the year.
6. Learn all the tax return filing deadlines for the year
Missing IRS deadlines can result in costly fees and interest charges on your tax bill. To help make sure you don’t miss the due date, follow these simple steps:
- Mark your calendar for any quarterly and annual due dates for each tax year
- Get your tax forms ready in advance and confirm if you can file business taxes online
- Create a dedicated space (physical or digital) for all tax documents and receipts
- Track expenses as you go instead of waiting until tax season to dig through receipts
Taxes are also much easier to submit on time when you keep a running list of expenses such as payroll, healthcare premiums and utilities.
If you are just starting your small business, plan how to organize your tax records as part of your small business financial plan right from the beginning. It also helps to consult with a certified professional accountant (CPA) or licensed tax professional when filing small business taxes for the first time to ensure you take all the right steps and maximize your deductions.
