Startup Taxes: What to know for 2020
You’ve taken the leap and started your own business, working to achieve your dreams and build your company. When tax time rolls around, you may not know what to do to obtain maximum tax savings while protecting yourself from the IRS.
There are actually some special tax breaks and deductions that you can benefit from as a business owner; you just need to know the right things to look out for when preparing your tax return. Here are some key tips for you to keep in mind when you prepare to submit your taxes in 2020.
Deducting Startup Costs
When you launch your own business, there is a special category of business tax deduction that can apply to your efforts to start the company. Business expenses don’t only include those that were incurred after the company was officially up and running.
Your market research, consultancy expenses and advance advertising may all be tax deductible as startup costs. In general, keep in mind that you need to actually start the company for these expenses to be fully deductible. However, if you didn’t start your business this year, save those receipts; you may be able to include them when you do launch the company.
Spreading Out Startup Expenses
In your first year in operation, you can deduct up to $5,000 specifically in these start-up expenses. However, you may have spent more than this to launch your company. This does not mean that you lose out on your deduction; you may be able to amortize your startup costs and deduct a portion each year for up to 15 years.
Saving On Organizational Costs
Your small business may also be able to deduct up to $5,000 in organizational expenses, particularly if you are not operating as a sole proprietorship. You could deduct the costs, such as legal fees and registration costs, of launching a corporation, limited liability company or partnership. These expenses must have been paid before the end of your first year in business.
Depreciating Capital Assets
Other types of business expenses may not be fully deductible as startup costs, but you can deduct the cost of depreciation, the loss in value of these assets over the year. These types of expenses are typically physical items (or software) that you purchase for the business, including computers, vehicles, office furniture or specialized software. There is a specific number of years for which you can take a depreciation deduction for each type of asset.
Keeping Clear Records
One of the most important things you can do to maximize your savings, ensure you receive your deductions and protect yourself from any IRS inquiries is to keep clear and complete records.
This includes hanging on to the original receipts and invoices for your business expenses, tracking your mileage and other expenses carefully and maintaining strong accounting records and profit-loss tracking. If there are any questions about your tax filings, you should be able to answer them with documents.
Understanding Your Tax Burden
The types of taxes you pay may depend on the corporate structure of your startup. Most small businesses in the U.S. are sole proprietorships, and you report the income as part of your regular personal income taxes.
Partnerships use a different format, while limited liability companies and S and C corporations have different responsibilities.
Partnerships must submit an informational tax return and issue schedules to the partners, while corporations must file their own federal taxes.
You should also be clear about your state and municipal tax obligations, depending on where your business operates. In some states, you may need to pay a franchise tax if your corporation is officially incorporated or doing business there. Keeping track of your tax burden in advance can avoid unpleasant surprises or unnecessary penalties.
Remembering Your Responsibilities
Remember that your business may also have tax-time responsibilities to others. If you hired freelancers or independent contractors and paid them over $600 during the year, you may need to issue a 1099-MISC form and send it to both the person you hired and the IRS. If you fail to do so, your business could face costly penalties.
These are just a few things to keep in mind when getting ready to file your startup’s tax return. It can be confusing, and you don’t have to navigate it on your own. At Picnic Tax we connect you with experienced online accountants who can prepare your tax returns and work to ensure you receive all of the deductions and credits you deserve, without in-person meetings and at the click of a button. Contact us to find out more about how we can help you.