Common Tax Mistakes That Cost Startups


Common Tax Mistakes Startups Make

Avoid these tax mistakes that startups often make

When you’re an entrepreneur, you have to be on the lookout for common pitfalls that can lead to wasted money. Small businesses should be especially vigilant because they typically don’t have much room in their budget to allow for falling into money traps. Avoiding tax pitfalls requires vigilance year round. The following information can help you avoid common mistakes that startups make so that you don’t overpay at tax time.

Overlooking startup costs

Startup costs are big, but fortunately, they also lead to big deductions. If your business is just starting out, make sure to deduct all eligible expenses in order to help your starter budget go further. Eligible expenses can include market research, business travel and advertising. For the 2013 tax year, startup costs in the first year were deductible up to $5,000.

“Almost any action you take to get started, including advertising, market research or travel to meet with potential customers, is eligible for a deduction,” according to Polly Brewster from Entrepreneur.com. “If your costs go over $5,000, then you can look into rolling out the deduction for up to 15 years depending on how high they are.”

Not tracking expenses properly

If you have an entertainment or travel business expense over $75, it’s important to save the receipt along with any other written proof of the cost. Furthermore, be sure to include a record of the reason why the cost was incurred. Even if a receipt isn’t required for expenses under $75, you’re better off saving and documenting everything, just in case.

Another tracking mistake that startups make is not logging travel expenses that can be reimbursed, which can really add up.

“It could be on an app that tracks your miles,” states Barbara Weltman, author of J.K. Lasser’s Small Business Taxes 2014. “Just be sure that you’re legitimately driving for business like going to the bank to make a deposit or meeting a client. Commuting can’t be deducted.”

Thinking supplies and equipment are the same thing

Supplies and equipment are not the same things, and the rules for deducting each type of expense differ.

“Supplies are the small things you use in your office each day, like pens or post-it notes,” states Brewster. “Equipment is the big-ticket items from computers to storage facilities.”

The rules for these types of deductions are also in flux currently, so it’s important to talk to a tax professional in order to get your maximum deduction for supplies and equipment.

“In 2013, you could elect to deduct up to $500,000 of equipment purchases, but Congress has allowed that to expire next year and the limitation drops to $25,000,” states Brewster.

Not taking home office deduction

Many people used to forgo a home office deduction because they felt that it would lead to an automatic audit or they didn’t know how to calculate the percentage of home expenses that could be attributed to the home office. Now, there is a standard deduction for the square footage of your home office in order to make things easier and save entrepreneurs money.

Misclassifying employees

Never misclassify employees as independent contractors to save money because the IRS keeps a close watch for such activity.

“If the IRS finds you guilty of misclassification, you’ll face a tidal wave of penalties and back payments of payroll taxes,” states Brewster. “Plus, you might have to pay out of your own pocket — even if you’ve filed for bankruptcy.”

Not hiring a professional

“Your job is to get your company up and running — to focus your energy on creating your product, forming strategic relationships, and other big-picture ideas,” according to David Ehrenberg, contributor to Forbes. “The last thing you want to think about is taxes. It’s essential to hire a tax advisor to accept liability, and make sure you follow all regulations.”

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