Taxes for Success: Advice for Business Owners and Entrepreneurs

When considering the venture of starting a business, people are often curious about the tax advantages and disadvantages. There are several options that business owners can take advantage of when considering their taxes.

As a certified public accountant, I can offer some general advice for those who are currently operating businesses and for those who are considering taking a leap into the realm of self-employment. It is important when reviewing tax information to remember that each business owner and taxpayer has a unique situation. While general tax guidance can be provided, it is a good idea to consult a professional tax preparer to understand your own best options.

Entrepreneurship is both exciting and complex. In addition to a solid tax plan, paying attention to the following causes of struggle can help you navigate the upstart of your business:

Accountants are often asked about the advantages of owning a business and the related tax deductions that are available.  Entrepreneurship is not for everyone.  Statistics show that 40 to 50 percent of new businesses close within five years of commencement.  According to a Wall Street Journal article, the reasons for failure are primarily associated with the following:

• Taking an emotional approach instead of economic approach to pricing
• Non payment of taxes
• No knowledge of industry
• No knowledge of financing needs
• No experience with recordkeeping
• Living beyond the means of the business
• Lack of planning

If you are a successful entrepreneur or are interested in becoming one, it is important to understand income taxes and how they are reported on your personal returns. Most small-business entrepreneurs will report their business activity as a “sole proprietorship” and report the results on Schedule C of their 1040.

In addition, self-employed individuals are required to pay into Social Security and Medicare. These are called “self-employment taxes.” Self-employment taxes are designed to account for the fact that self-employed individuals do not have Social Security and Medicare taken out of their paychecks. Business owners have to pay it in on their own behalf. Schedule SE does that at a rate 15.3 percent. This is in addition to regular income taxes.

Business owners are able to deduct all “ordinary and necessary” expenses to arrive at net income. This is where it takes a knowledgeable tax preparer that understands the nature of the business to discover all of the “ordinary and necessary expenses” that can minimize self-employment  and income taxes.

Here are a few areas where deductions can be found that are often missed or underused:

Auto Expenses– As an entrepreneur you are able to deduct vehicle-related expenses for all business travel. This includes out-of-town travel to business meetings, conventions, meeting with customers, errands around town and other business-related travel. Remember that commuting (travel to and from the workplace) is never deductible. However, if your workplace is in your home, all business-related mileage is deductible. The 2016 business mileage rate is 54 cents per mile. So for each 100 business miles travelled you can take a $54 deduction. This deduction takes into account all of the related auto and truck expenses, including gas, oil, repairs, tires, insurance, depreciation and so on.

Business Use of Home– Entrepreneurs who work out of their home are usually able to qualify for the home-office deduction. To qualify you must use a part of your home regularly and exclusively for business purposes. The form used to calculate the home office deduction is IRS form 8829 which is used to determine the share of mortgage interest, property taxes, insurance, utilities, repairs and depreciation on your home that you can deduct from your taxable business income. For tax years after 2013, the IRS came up with a simplified option for the home office deduction, which is a standard $5 per square foot of the home used for business purposes up to a maximum of 300 square feet. There are some clear benefits of considering the simplified approach.

Depreciation/IRC 179 deduction– One of the more complicated areas for record keeping is tracking depreciable assets and understanding depreciation. This is where a tax professional can be of significant assistance. IRS code section 179 allows a taxpayer the opportunity to expense a capital item such as computer, equipment or furniture in the year the asset is placed in service. The maximum amount allowed per year is now set at $500,000. This can be a significant tax savings tool for tax planning purposes.

Understanding financial and tax matters strengthens the freedom and excitement of entrepreneurship. The IRS and state governments are integrally involved as strategic partners in business progress. It is important to pay attention to all of the details and take advantage of all of the areas where tax breaks and deductions are available within the law.