At age 16, I started my own business. I went door-to-door selling Avon products. I loved those little samples the company provided to me to give out to potential customers. Over the years, I’ve sold handmade hippie shirts, worked as a Career Counselor, sold real estate and now run my own financial media company. Aside from the financial rewards, the tax benefits are fantastic. If you have a side hustle, you need this small business tax preparation checklist.
I came from a family of entrepreneurs, my Mom, Dad, Grandmother, Aunts and Uncles on both sides were all entrepreneurs. A pillar lesson from my Dad was to be mindful of the tax law and to maximize legal tax deductions.
Early on, I learned the benefits of Schedule C and legal small business tax-write offs. Simply, if you have a business-related expense, you can subtract that cost from your income and lower your taxable earnings.
For example, assume that you earn $3,000 one month. But you purchase business supplies, subscribe to a trade paper, pay for advertising, purchase software or use a room in your home for an office. Next, add in depreciation on your equipment and other miscellaneous business-related costs. When calculated on a monthly basis, these expenses might tally up to $1,500. Subtract the expenses from your income and you could lower your taxable income from $3,000 to $1,500.
If you’re in the 15% tax bracket, that’s a savings of $225 in one month.
How do you know how to organize and manage your income and expenses?
In the early days, I threw the tax-deductible receipts into a folder to organize later. I had a mileage book to keep track of business mileage. Today, it’s so much easier to stay on top of your business expenses. For mileage tracking, use an app such as tripLog or MileIQ. QuickBook’s business expense page keeps all of your business costs organized.
I’ve used Quicken and QuickBooks products for years, to manage both my business, investment and personal finance income and expenses. If you’re just starting out or need some organization help for your small biz, check out the following business deductions to do list, so that when tax time comes around, you’ll be ready to file without the fanfare.
Your Small Business Tax Deduction To Do List
1. Understand the tax system.
Look over a copy of your 1040 and Schedule C. You’ll find all the tax forms and information at the IRS.gov website. I know it’s tedious, but if you examine the relationship between income and expenses, it’ll give you an opportunity to maximize your legal tax write-offs.
2. Familiarize yourself with legal business tax deductions:
|Advertising (Line 8)||Any materials for marketing your business (e.g. flyers, signage, ads, branded promo items, events or trade shows) and the cost of developing those (e.g. agency or designer costs).||Office holiday parties, gifts (e.g. books) that aren’t branded (use “Other Expenses”)|
|Business Insurance (Line 15)||Insurance intended to protect your business (e.g. fire, theft, flood, property, malpractice, errors and omission, general liability, malpractice, workers’ compensation).||Health insurance, auto insurance (use “Car Expenses” or Add Mileage), disability insurance|
|Car Expenses (Line 9)||The business portion of your actual car expenses (e.g. gas, insurance, registration, repairs and maintenance) or public transit expenses (e.g. buses) if you use local transportation.||Expenses (other than Parking/Tolls) if you use the standard mileage rate (use Add Mileage)|
|Depreciation and Section 179 (Line 13)||Depreciation expense on business assets (e.g. computers, office equipment, tools, furniture, cars). Note: The IRS requires you to use Form 4562 to claim these deductions.||Car depreciation if using the standard mileage rate (use Add Mileage)|
|Home Office Deduction (Line 30)||Expenses related to a home office (e.g. business portion of rent, utilities, repairs, insurance, mortgage interest). You’ll need to fill out a Form 8829, unless you use the simplified method.||Expenses if you use the simplified method (it includes all home office expenses)|
|Meals / Entertainment (Line 24b)||Meals or entertainment that you had with a client and during which you engaged in business discussions, or those incurred while traveling on an out-of-town business trip.||Meals for yourself (e.g. on lunch breaks); dues for athletic clubs|
|Office Expenses (Line 18)||Office expenses (e.g. cleaning services for office, general office maintenance) that don’t have a separate category.||Home office costs (use “Home Office”), rent (use “Rent”), utilities (use “Utilities”)|
|Supplies (Line 22)||Any supplies that you use and replace (e.g. cleaning supplies if you clean homes, office supplies like pens or printer ink, hot/cold bags if you do delivery).||Office decorations and some other office expenses (use “Office Expenses”)|
|Travel (Line 24a)||Travel costs related to business trips (e.g. lodging, airfare or rental cars, local transportation). The travel must be overnight, away from your residence and primarily for business.||Personal costs while traveling (e.g. dinner with a friend), meals while traveling (use “Meals”)|
|Other Expenses (Line 27a)||Any other business expenses that are ordinary and necessary (e.g. education to improve skills for your job, banking fees, association dues, business gifts, industry magazines).||Expenses with their own separate categories, expenses that aren’t ordinary and necessary|
3. Know when you can deduct health insurance premiums.
Line 29 on IRS tax Form 1040 is the Health Insurance Deduction location. You can deduct the cost of your personal health insurance premiums when you’re self-employed if you meet these criteria:
- Your business claims a profit.
- You aren’t eligible to participate in an employer’s health plan or your spouse’s plan.
- You can only claim premiums paid for the months you were ineligible for the employer’s health plan.
4. Don’t expect to ready your taxes in an hour, or a day.
In January, or now, make a list of your tax-prep activities. Whether you DIY or hire an accountant, you’ll have to organize. Your tax prep to do list will include:
- Find last years tax return.
- Receive and sort all 1099s, K-1s and other tax forms.
- List income and expenses.
- Input information into a tax software program, such as Turbo-Tax or organize records for your accountant.
Schedule the tax preparation tasks out over several days or weeks.
5. Compile a list of questions for your accountant.
It’s inevitable, questions will come up. You can either research the answers online or list them to discuss with your tax preparer. Questions might include whether certain items are deductible or not or how to calculate the gain on an investment asset sale. By writing down your questions, you won’t be frustrated by incomplete information when it comes time to complete the tax forms.
You might want to buy tax-preparation software, even if you use an accountant. It’s a good way to help you organize the tax preparation task.
Small Business Tax Prep Take Away
Buy tax-preparation software, even if you use an accountant. It’s a good way to help you organize the tax preparation task.
Like any large task, breaking up your business tax preparation into smaller steps helps you conquer the job. Don’t procrastinate, start today and you’ll get the tax filing job done in advance, instead of at the last minute.
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