As a new small business owner, you will likely have a lot of expenses associated with starting up your company. This includes preparation costs such as equipment, advertising and marketing expenses, and travel expenses. You may also have organizational expenses such as the cost of incorporating your business, registering trademarks, and salaries for company directors. The IRS allows you to deduct these expenses in the year before your business opens. Most startup costs are investigative and organizational and can be claimed in the first year of your business’s existence. This includes laying the foundation for your company, such as advertising and creating a website. These costs can also include legal fees and professional services, such as a for-hire bookkeeper or accountant.
Similarly, most equipment and materials that are necessary for your company’s operations are deductible. Some of these can be depreciated over several years, which can reduce your taxable income. However, it is important to consult a tax advisor to ensure that you are getting the most out of these deductions. Using an accounting system that allows you to track these expenses daily can help you avoid missed opportunities. For example, some software programs can keep records of these expenses for you automatically, so you don’t forget to claim them when filing your taxes.
Tax Filing Software
One of the most important tips for new small business owners is to make sure you have tax filing software. This software will help you calculate deductions and file taxes online with maximum refund guarantees. This is especially helpful for startups with limited budgets, as this type of software will save you money on professional fees.
Small Business Tax Deductions
Small business tax deductions are a great way for small businesses to reduce their income taxes and keep more of their hard-earned profits. However, claiming these deductions requires careful planning and diligent record-keeping. It’s also important to understand how they work and how they differ from credits.
The IRS defines a deduction as an ordinary and necessary expense for the trade or business. To qualify, the expense must also be capitalized. Capitalized expenses are depreciated over several years, which helps the company accurately assess profitability each year.
Many small business startup costs can be claimed in the first year of operation, including computer hardware and software, furniture, office supplies, and marketing materials. In addition, entrepreneurs can use the home office deduction if they conduct business outside their primary residence. This includes a single-family house, condominium, apartment, or manufactured home.
Hiring employees is another large startup expense that’s typically deductible. As a pass-through entity, you can claim wages, salaries, commissions, bonuses, health insurance, retirement plan contributions, and fringe benefits.
Small Business Tax Credits
Many startup companies fail to take advantage of tax credits, which can significantly reduce the amount that they owe at tax time. A qualified startup accountant can help them identify and claim these valuable tax incentives. Startups often issue equity to their founding team and early employees, including restricted stock units (RSUs). If a company is acquired and RSUs are converted into new shares or cashed out, the founders and early employees may be subject to taxes on the value of the new shares. Startups can avoid these taxes by implementing a Section 83(b) election before the acquisition.
Another way that startups can save on taxes is by offering a qualified retirement plan. The IRS offers a tax credit of up to $5,000 annually for the first three years that a startup establishes the plan. However, startups must ensure that they are meeting all the requirements for this credit. The help of a qualified startup accountant can make sure that they are. This is especially important given the recent 401(k) tax code changes.
Retirement Plans
Offering retirement plans is one of the most significant ways for small businesses to help their employees save for the future. It also provides numerous tax benefits that can help a business save money, including the retirement plan startup costs credit and employee match credit.
Small business owners may choose a Simplified Employee Pension (SEP) IRA, a Savings Incentive Match Plan for Employees (SIMPLE) IRA, or a individual 401(k). Each option is easy to set up and manage but has unique contribution limits. A SEP IRA is great for smaller businesses and self-employed individuals because it allows higher discretionary contribution limits than traditional IRAs.
An individual 401(k) requires more paperwork and administrative responsibilities, but it offers greater flexibility in how funds are invested. Lastly, a SIMPLE IRA is more restrictive in how much the employer can contribute to employees’ accounts. However, it has the added benefit of a lower startup cost and can be claimed in the year that the plan is established. Many small business owners are concerned about the cost of implementing and communicating a retirement plan for their employees. The good news is that there are several new, low-cost solutions that can help them reduce these expenses.
