As a small business owner, you have worked tirelessly to build your business. You didn’t do it for nothing. Your end goal, if you are like the majority of small business owners, is to turn a profit. It makes no sense that you have been working day and night only to have a couple bucks in your pocket come the end of the year. Unfortunately, that may be exactly what is happening if you have taken bad advice when it comes to preparing your taxes.
When people start off in the business world, they may try to wade through taxes on their own when April rolls around. It usually only takes trying to deal with this once before small business owners consult a tax professional. You may be assuming, and rightly so, that you are getting good advice from these professionals. In most cases you will be, but in others, you could be getting advice that is keeping you from lining your pockets and chucking your money straight at the government.
You don’t want to spend years trying to earning a living on your own only to find out that you’ve been given poor tax planning advice. If you are taking deductions when you file taxes, you better be sure they are the right ones and are based on your current business model, not the one you started out with.
In today’s economy, there are over 15 million people who are either self-employed or own their own business. It can be incredibly tempting to spend as much as you are bringing in and then hope to take as many deductions as you can at the end of the year. Be warned: This could get you into hot water, both financially and with the government. As a self-employed person, you need to know what you are doing as far as deductions and taxes. That may mean doing a bit of research on your own after you talk to a tax professional. Be aware of these tax deductions that can harm your business.
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Here are some things to think about when it comes to deductions:
100% of Your Vehicle
Sure, you drive your vehicle back and forth to business meetings. But you also drive it back and forth to your kids’ school. You drive it to take potential clients out to fancy dinners. But you also drive your kids to the fast food joint on the corner. Be very careful about taking your vehicle as a business deduction if it is not solely used for that purpose.
If you only have one car, you’ll need to use it for both purposes: business and pleasure. That means that you can’t deduct 100% of its value and expenses. Instead, you should be keeping track of your mileage and purposes for each trip and handing your records over to your tax preparer. Believe us when we say that the government won’t believe you are using your vehicle for business and public transportation for pleasure.
Meals and Entertainment
You have to eat at work. Maybe you even entertain clients. Be very careful to keep all of your receipts and detailed records of your meetings. Do not be tempted to overstate these expenses, no matter what your preparer advises. If you are taking itemized deductions, you are going to raise a red flag by taking thousands in meal and entertainment deductions for your business.
Deductions In General
We’ve pointed out to of the most common mistakes, now let’s take a look at deductions in general and how they can hurt you.
Let’s say that your goal is to put more money in your pocket. You believe that you can do this by taking advantage of deductions and reducing the amount of your net income. This is true. That said, what if you want to buy a house or a new car? What if you need a personal loan? If your only source of income is from your business, lowering your net profit could hurt you in the long run.
Now that we’ve considered life events that could happen as soon as tomorrow, let’s talk about those life events that may not be happening for another decade or two, if not longer: retirement. Spending the money you make from your business for your business can reduce the amount of self-employment tax you have to pay (in some situations). This may seem like an excellent idea, until you need to rely on Social Security for your income.
When you pay less into Social Security, you are essentially taking away from your own retirement. If you have other plans in place, such as IRAs or 401(k)s, making smaller contributions into Social Security probably isn’t that big of a deal — unless the market crashes. Be aware of how and how much you are contributing. Speak with a retirement planning specialist. This is the professional who can take a look at your business filings, discuss your future goals and help you make a sound plan toward saving for your golden years.
Most small business deductions won’t hurt you. In fact, some can be incredibly beneficial. Know this, though. If you decide to play a game with the government, you may win a few rounds, but you will eventually lose. In some cases, you could be hit with steep penalties. In other cases, you may be facing criminal prosecution. So whether intentional or not, be aware of these deductions that can harm your business.
Company.com Can Help Track Expenses
At Company.com, we’ve partnered with FreshBooks to make billing and tracking expenses easy. With this easy tool, you can automate much of your normal data entry to make the process that much simpler. And when tax season rolls around, you can quickly see what expenses you need to deduct — and avoid deductions that can harm your business. To learn more about this service and the others we offer, or to start a free trial of our premium software package, contact us today.