Knowing What To Write Off
There are many things that small-business owners try to make the mistake of writing off but later get into trouble with the IRS. “There are certain things that are really problematic from a justification standpoint,” says Michael Minyard, president of an accounting firm in Phoenix that specializes in small businesses. “Personal expenses are personal. Don’t try to mix them with business.”
Some of the things that business owners will have problems expensing include health insurance and as well as vehicle payments. However, if you do use your vehicle for your business, you can probably deduct mileage. And depending on the nature of your venture, you might be able to lease a vehicle to it, Minyard says. In some cases, your corporation might be able to own the vehicle outright as well. But the IRS will often question the flat-out expense of car payments and insurance, so make sure you discuss this with your advisor before making any assumptions.
However, there are many instances in which business owners should be expensing charges and fail to do so. Oftentimes, entrepreneurs will overlook transactions that were made in December and not remember to include them at the end of the year because their credit-card statement shows up in January.
Business owners also commonly fail to expense their startup expenses that were used with personal funds when launching an enterprise. Just because those funds were deployed before the venture got off the ground doesn’t mean that they can’t be expensed.
Pay Attention to Personal Taxes
If you end up earning more cash than you spend on your business you may need to pay personal income taxes on your profit. This is particularly true if you are reporting the ‘profit’ on your personal tax return on a Schedule C, which itemizes your business revenue and expenses, that income ends up in your personal tax return no different than if you had received a paycheck from an employer.
Any earnings of this type on your personal tax return may also create self-employment taxes that you have to pay. Self employment taxes are payroll taxes that typically an employer pays to the government on a matching basis based on what you earn if you are drawing a paycheck. At a minimum you will likely have to pay the IRS something toward the Social Security component of these taxes. The IRS doesn’t like to wait for its money.
It’s smart to review with your tax accountant how much you may owe during the year and make quarterly payments to the IRS against that projected amount of earnings. For example, payments for this year are due on the 15th of April, June, September and next January. If you don’t make these payments on time, the IRS could hit you with fees and penalties. Again this tax liability is in addition to the federal and state income tax you owe as an individual on the business earnings passed through to your personal taxable income.