Being a small business owner since 1996 and operating at tax preparation service business for 10 years, I have collected a number of small business tax saving tips along the way. The following tax planning tips are general in nature and are intended to provide possible tax saving strategies for home and small business owners. There are exceptions to every rule, and not everyone will benefit from these tax saving tips. There are many other factors that should be considered before using any of these ideas.
Small business owners can maintain a qualified home office and deduct otherwise nondeductible home expenses. It is easiest to do this if there is a room set aside for the business. Determine how much that room is in proportion to the house, and then deduct certain expenses proportionally. Expenses include mortgage interest (but not the mortgage itself), electricity, telephone, insurance, and expenses for maintenance and repair. Certain mileage also becomes deductible.
Turn charitable donations into business deductions by giving money to charities in exchange for advertising. Donating to that church fund raiser? Buy advertising instead. This is a great way to get your brand out to the public.
Employ a child and save on FICA (Federal Insurance Contributions Act), which is a combination of Social Security and Medicare taxes and shift income to the child’s lower tax bracket. Wages are exempt from FICA if the child is under 18 years of age. The small business is also exempt from paying the employer portion of FICA. An employer-parent can shield Self-Employment income from taxation by hiring his or her child. Just make sure your child is doing real work.
Use Schedule C to report business income as a sole proprietorship. If more than one individual is an owner, then the business is not a sole proprietorship and Schedule C cannot be used. Partnerships and joint ventures must file on Form 1065.
A husband and wife cannot jointly own a business as a sole proprietorship; and cannot split a sole proprietorship and file two Schedules C. To avoid being classified as a partnership and having to file on Form 1065, a husband and wife team operating a business together should treat one spouse as the owner and the other as an employee. Good luck figuring out who is the boss and who is the employee!
If a sole proprietor owns more than one business, filing a separate Schedule C for each business is required. Penalties apply if more than one business is combined on a single Schedule C.
Convert nondeductible hobby losses into deductible business losses by operating the activity in a business-like manner. The activity must be conducted as a “for profit business.” “For profit business” activities include keeping thorough and business-like records and files, using a separate business bank account, using separate credit cards, maintaining insurance, registration, licenses and certifications normally needed by that type of business, maintaining separate home office among other things.
As with any business, individual circumstances vary as do state laws. Consult with your attorney or tax consultant to determine individual requirements and needs when it comes to implementing any small business tax saving tips.