It’s clear that filing taxes this year will be more complicated than is typical. Some individuals may have lost a job or worked more than one job at a time. Many have collected federal stipends along the way. Therefore, a good number of businesses will be on the receiving end of a tricky filing situation. And for the more than 4.1 million people who started a business in 2020, the process will likely prove even more confusing and intricate than ever. But luckily, there are a few key tax tips that new entrepreneurs can and should keep in mind ahead of the April 15 deadline this year:
Tax Tips to Know Before the Deadline
1. Know what can and can’t be deducted
For instance, while work-related travel expenses – including flights and hotels – can be written off at tax time, it’s important to note that you must be traveling away from your home for longer than a normal workday. Therefore, same-day trips don’t make the cut! Business insurance can also be deducted, as can office supplies.
2. Don’t forget your first-year perk
In the first year of establishing a business, sole proprietors are able to claim up to $5,000 in “startup costs.” This could include anything from legal counsel to advertising and consulting fees, as well as bookkeeping software such as Xero. Even better, you don’t have to pay back the expenses for (at the minimum) a few years.
3. Keep your receipts
This means even after this year’s filing. Since the year you start your business is often the least stable, it’s essential that you follow the golden rule of keeping your receipts for at least three years – though five is preferable.
4. Plan out your cash flow, and prep for Tax Day accordingly
While the COVID-19 pandemic threw everyone for a loop, more generally, many business owners have a fairly accurate outlook of their revenue and subsequent tax year. The better that outlook, the more you know whether or not you need to put money to the side or arrange for a line of credit. Doing so could avoid an interest payment or potential penalties down the line.
5. Give back a little
While new businesses are typically strapped for cash, giving back (at least a little!) to charity has two-fold benefits. First, it helps with your business’ CSR, but could also provide your business with a tax deduction equal to the market value of what was donated. However, before filing, it’s important to know the entity and filing type (e.g., S Corp), as there are different deduction rules based on that factor. In addition, you also have to take into account the entity that you donated to, as that must also be considered a “qualified organization.”
While starting a business last year required bravery not inherent in all, there are ways to save you and your business money and protect what funds you do have to spend. Many of these hard and fast rules could not only protect cash flow in the long run but also provide necessary structure in preparation for Tax Day.
Ben Richmond, U.S. country manager at Xero
Ben Richmond is a chartered accountant and U.S. country manager at Xero. He is responsible for driving Xero’s growth in the region. He has been recognized by CPA Practice Advisor as a “20 Under 40 Influencer” and was named Accounting Today’s “Top 100 Most Influential People in Accounting.”
Source: Smart Hustle