Many businesses start off as small home-based small businesses. According to the Global Entrepreneur Monitor Report, 69% of all start-ups in the United States are home-based businesses and 59% of established businesses more than three and a half years old continue to operate as home-based businesses. However, what is often overlooked by these small operations (and those looking to start such a business) is proper tax planning.
According to Meisa Bonelli, Managing Partner ofMillennial Tax, a provider of tax services for small/home-based businesses, start-ups and solopreneurs, these same individuals are serial late filers and miss out on maximizing tax benefits that are unique to their type of business structure. To prevent this from happening, she recommends the following seven pieces of advice:
Choose the Right Entity for Your Business. Oftentimes when entrepreneurs look to incorporate, they think of choosing an L.L.C. or S-corporation, rather than consider what structure would be most beneficial from a tax standpoint. “A lot of these entrepreneurs are just looking to be a lifestyle company – between $100,000 and $1 million in revenues. So they have to consider their federal, state and municipal tax implications and their business objectives” advises Bonelli. “Then choose an entity from that standpoint.” Continue reading →
Successful tax planning can take many forms, but we can identify one way that is guaranteed not to work: a frantic dash to your tax professional on April 14th with a disorganized box of tax documents and receipts spilling out of the top. If you organize your materials and spend a bit of time throughout the year handling tax issues preemptively, you can avoid unwelcome surprises in your tax bill.
Here are five of the biggest mistakes that you can make with respect to tax planning:
Poor Organization – If you use the metaphorical (or literal) shoebox full of receipts, it is likely that you are not going to take full advantage of deductions available to you (such as charitable deductions) because you have either lost the proof that you need to justify the expense to the IRS, or you have forgotten about it entirely. You do not have to go so far as to create your own ledger, but organizing and categorizing your tax documents as you receive them can go a long way when April rolls around.
– The Alternative Minimum Tax is effectively a parallel tax system to ensure that wealthy Americans cannot take so many legal deductions that their tax bill approaches zero. The AMT had not been adjusted for inflation until recently, so if you are in an intermediate or high-income bracket, you need to calculate your tax under both AMT and standard 1040 methods, and must pay the higher of the two taxes. Failure to pay the correct tax results in significant penalties.If you are in a borderline income area that could trigger the Alternative Minimum Tax, you may want to take actions throughout the year to lower your adjusted gross income (AGI), such as maximizing contributions to 401(k) plans and IRA’s (which is a good idea regardless of taxes), or timing stock/option sales differently.If the AMT appears inevitable, you may want to take different actions during the year because many itemized deductions are eliminated by the AMT.
Not Adjusting Withholding – If your situation changes throughout the year, such as changing jobs, getting a raise, being temporarily laid off or getting a second job, getting married or divorced, or having a child, you will want to raise your withholding with your employer(s) to avoid significant overpayment or underpayment of taxes. Don’t forget to adjust any state withholding as well as federal.
Ignoring Mutual Fund Reinvestments – If you are reinvesting proceeds in a fund such as through an automatic reinvestment of dividends, it will be important to add the cost of those additional shares to your originally invested amount. Otherwise, you will be subject to double taxation – you will pay taxes on the distribution, and then again later when the funds are sold. It won’t affect what you pay this year, but it will save you from paying that same amount again in the year you sell the funds.
Missing Quarterly Estimated Tax Payments – If you are in a situation where you pay quarterly estimated taxes, such as self-employment/independent contracting, it is important to pay these taxes on time. Waiting to pay until you file your income tax returns can result in significant penalties.
Certainly, other mistakes can be made while planning for taxes, and which ones are the biggest from your perspective may depend on your tax bracket. However, the biggest planning mistakes all have one thing in common – they represent some sort of failure to plan. The best advice is to pay attention, and plan accordingly. Try the CashFlow Manager FREE for 7 days. Just email me firstname.lastname@example.org
There are several benefits of starting a home-based business. In this post, I will discuss 5 benefits I have discovered to starting a home-based business.
The fastest category of business start ups in America is the home-based business. Millions of people realize the flexibility that comes with growing your company out of your home versus the challenges of renting or buying expensive office space. During the start up years of a new business, the home-based business model can offer numerous substantial benefits. Continue reading →