Launching a startup is stressful. Between finding investors, looking for office space, and hiring the best team, you’ve got a lot on your plate. Now that tax season is in full-swing, filing your tax return is probably the last thing you want to worry about.
But, the longer you wait the more you increase your chances of making costly mistakes. The last thing anyone wants is a penalty from the IRS. To make your life easier, take a look at these seven common Startup tax mistakes and how to avoid them
1. Not paying quarterly taxes
Some businesses, like sole proprietors, are required to pay their taxes on a quarterly basis after being in business for one year. It’s a good practice to start paying quarterly taxes, even if you’re not required to. This way you can avoid paying a lump sum all at once.
Get into the habit now of setting aside a percentage of revenue for taxes automatically. Go over your profit and loss statements each quarter and pay your bills accordingly. Consider hiring a tax advisor to help you get an estimate of the payments you should make.
2. Not sending 1099s
If you work with contractors or freelancers, 1099s are essential. It's the form you’re required to send to contractors and the IRS, if you don’t you can expect to be fined up to $250 for each form that you don’t send. You can also face penalties for sending the forms in past the deadline. So, the bottom line is to make sure you send these out on-time.
3. Not tracking expenses
One of the most significant tax mistakes startups make is not keeping track of your expenses. In this digital age, when most transactions are done online there’s no reason you shouldn’t be using accounting software, like Quickbooks or FreshBooks, to manage your expenses.
Regularly keeping track of your expenses, and having them all in one place will make filing your taxes much easier.
4. Legal entities
The legal structure of your startup affects the way you report your taxes and the amount you need to pay. For example, if you’ve just started out the idea of forming your company as a sole proprietorship may sound appealing, but you could find yourself paying significant self-employment tax. This is why many entrepreneurs choose to organize their startups as LLCs or an S Corporation. There are pros and cons to each legal entity, so make sure you consult with a legal or tax professional beforehand.
5. Writing off personal deductions
When first launching a startup, you’re investing so much of your time and money that your personal and business finances may become nearly indistinguishable. This can lead to a lot of confusion at tax time. IRS rules state that you cannot deduct personal or family expenses on your business tax return.
However, as a startup owner, you’re probably using some equipment, like your computer or your car, for both business and personal reasons. In this case, you can still deduct this expense, but only the portion that’s used for business.
For example, if you use your personal laptop 50% of the time for business, you can deduct no more than 50% of that cost.
6. Improperly characterizing expenses
The IRS has complicated rules around what expenses you can write off on your tax return, making it easy for even experienced business owners to get tripped up. One of the most common mistakes is confusing equipment and supply costs. Doing so could lead to costly fines from the IRS.
Generally speaking, equipment is defined as expensive, high-value items that you plan on using for more than a year, like an industrial copier or fax machine. On the other hand, supplies are typically smaller office items like pens and notepads.
They’re both tax-deductible, but you need to make sure you mark them in the appropriate category on your tax return.
7. Not writing off business insurance
Commercial insurance is essential for every startup, and some form of it is often legally required. Luckily for startup owners, many policy premiums are also tax-deductible so long as they are considered necessary for your business. Some examples include:
The key takeaway
When it comes to your business taxes, think of it as a marathon and not a sprint. It’s something you should be thinking about and keeping track of all year, rather than the few weeks leading up to April 15th. If you keep these tips in mind you’ll be done with your tax return in no time, allowing you to get back to what matters--growing your startup.
Remember if you ever have tax questions, make sure you reach out to a CPA who can help you make the right decision.
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