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 of Millennial 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.”
Audit Proof Your Business. Entrepreneurs often do some of the right things from an accounting, but not all of the right things. “It’s either they don’t have a bookkeeping system, they’re not accurately saving receipts or they’re not keeping track of the business activity and that’s some of the core things they have to do to audit proof their business,” says Bonelli. And small businesses in this space are more likely to be audited, especially if they claimed the earned income credit along with any business income. “So they have to make sure their business is audit proof.”
Get a Home Based-Business Tax Professional. There are specific IRS rules and regulations that home-based business owners have to follow – particularly if they’re claiming a home office deduction. “The IRS has documented case law with regards to what these people have to do to solidify their business to be considered a business,” Bonelli states. “Many tax professionals do not know that the IRS has a full publication specifically on how direct sellers need to operate their business so it’s considered legitimate in the eyes of the IRS.”
Get a Second Look. Bonelli says 40% of her clients have approached her after experiencing an error on their taxes. “Per the IRS data book, mathematical errors are the main reason why the IRS will pursue a correspondence and/or field audit,” she says. “You want to make sure that if you feel like you’re paying too much or you’re not sure about your tax professional, I always encourage getting a second look at your tax preparation.”
Tax Planning is Year-Round. When you’re an employee, you just have to look at your taxes once a year, but depending on the corporate entity, there may be quarterly filings required. “So there should be an ongoing, consistent conversation with your tax professional, but when people transition from employee to entrepreneur, they don’t necessarily have the knowledge base to understand that you don’t need a tax professional just once a year,” Bonelli says. “Your tax professional needs to be someone you keep in touch with throughout the year.”
Start a Retirement Plan. Bonelli says the government makes it very advantageous for home-based business owners and solopreneurs to save for retirement. “In certain retirement plans, individuals can put in up to $50,000 a year and that’s something you can’t do as an employee,” she says. “Now you can put a lot more money away to fuel your retirement and investment goals, so you have to really keep that to the forefront of your mind because it’s going to become a huge part of your net worth.”
Have Integrity. When individuals move from employee to entrepreneur, they’re often afraid of the IRS, according to Bonelli. “But what they don’t understand is the IRS is friendly. They allow you to come to them and report that you’re actually doing,” she says. “So if you’re carrying adverse behavior into your business, then it’ll permeate into your tax situation. So integrity needs to be a value in every segment, in every department of your business – especially when it comes to taxation.”
December 26, 2014 //
by Kimberly Wilson -Blackenterprise.com Sometimes a leap of faith can be exactly the spark that’s ...
December 26, 2014 //
by Carolyn M. Brown -Blackenterprise.com Russell Hicks, founder of Ebony Suns Enterprises in Ph...