Whether you like it or not, tax time is here.
For W-2 workers, tax season can be less stressful since your employer deducts your taxes each pay period. In most cases, you will receive a refund from the government after tax season.
As for entrepreneurs, taxes are tricky since you pocket all your profits and must keep track of expenses to file them accurately.
On the upside, there are various perks available to entrepreneurs that can help them pay less in taxes.
Duke Alexander Moore, founder of Duke Tax, shared some helpful practices for entrepreneurs to file effectively.
The first tip is for those operating a business as an LLC, which requires bookkeeping.
“The number one problem that we see is just the lack of record-keeping,” Moore told AfroTech. “Let’s take these write offs, let’s take these expenses, let’s take these deductions. When it comes to creators, entrepreneurs, anyone in the digital space, make sure that you understand that you are a business and you have to operate like one.”
Avoid Co-Mingling Bank Accounts
You should open a business bank account and use it effectively. This will also make record-keeping easier since all transactions will be in one place. When expenses for a business are processed through both a business and personal account, this is called co-mingling, which should be avoided, he adds.
When an LLC is created you are protecting your personal assets in case of a lawsuit. However, if you begin running your business through your personal and business bank account, this will lead to piercing the corporate veil.
“Essentially when you set up an LLC, it provides a veil,” Moore said. “It’s protecting you from your personal assets. This veil says ‘I promise to keep everything separate, if in case of a lawsuit you promise not to touch my personal stuff.’ So, when you are mixing personal and business expenses, you’re now breaking that rule. You’re now piercing the corporate veil.”
Are You Qualified To Become An S-Corp?
There are additional practices to keep in mind that could save you thousands of dollars as well. Moore suggests entrepreneurs who qualify should consider upgrading their LLC to an S-corporation if their net profit reaches $56,000.
An S-corporation must “pay payroll taxes and take reasonable compensation,” according to Forbes. Due to the fact that you won’t be considered just a shareholder anymore, you won’t be liable for the self-employment tax.
“This is probably the most basic strategy that you can do that can instantly save you a minimum of at least $6,000 in taxes,” Moore expressed.
Health Savings Account
Additionally, Moore shares a health savings account (HSA) should also be considered.
According to HealthCare.gov, this is “a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.”
“An HSA is like a bucket of money,” Moore explained. “The money that you contribute to an HSA, you can write off on your taxes. It’s also in the investment vehicle. So while it’s investing, it’s also growing and this growth is also tax free.”
Itemized Deduction Or Standard Deduction?
He also urges you to consider whether you will claim a standard or itemized deduction during tax season.
According to H&R Block, “A standard deduction will decrease your income by a fixed amount, compared to an itemized deduction, which is a list of expenses eligible for a deduction.”
Take the route that will ultimately save you the most money, Moore suggests.
“90% of the people in the the world are probably gonna take the standard deduction,” Moore told AfroTech. “So, if you can itemize, I might, if you can’t, take the standard deduction. You always just want to compare the two numbers and take the higher of the two.”
Home Office And Mileage Tax Deduction
It is sometimes difficult to know what you can deduct during tax season. For example, a TurboTax expert provided information on the home office deduction.
There’s also the mileage tax deduction. Here are the rules.
Lastly, another helpful tip for entrepreneurs is to recognize that you can still write off your startup costs from before you established your LLC.
The QuickBooks Blog states: “The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. If your startup costs in either area exceed $50,000, the amount of your allowable deduction will be reduced by the overage. And if your startup costs are more than $55,000, the deduction is eliminated.”