There are hundreds of ways a small business owner can minimize their tax bill. Although the first two tips below may seem obvious, most small business owners pay too much tax because they aren’t tracking those two items correctly. As for the third tip, a small business owner rarely saves money by doing their own taxes. Read on to find out why.
Tip #1: Keep a mileage log
Tax professionals are always surprised at how many business owners don’t record every business trip on a mileage log. At about $.50 per mile, that bad habit can cost you hundreds of dollars in lost tax savings each year. And, for those who think they can only guess, failing a business mileage audit is quite expensive after adding interest and penalties.
Buy a printed record or small appointment book from the office and keep it in your car. Put it where you can reach it from the driver’s seat. Making the task quick and easy is the key to recording every mile traveled. For regular trips, start by developing a list of 1-2 letter codes for common errands. Record these codes on the front of your mileage log.
For example, you might use P for the post office and OS for the office supply store. Next to each code, record the exact mileage from your workplace to that location. Once you know it’s .6 miles from work to the office supply store, you can simply write OS.6 to your log each time you follow the normal route.
For one-time business errands, you will need to enter the starting and ending mileage; enter the difference in your mileage register. At the end of each month add up your miles and write that total at the bottom of the last page of the calendar. At tax time, add those numbers together and you’ll get total business miles driven and documentation to support your deduction.
Tip #2 – Track every penny you spend
If you don’t understand the tax code, you are missing deductions. By the time you’ve prepared your taxes, it’s too late to do proper bookkeeping. And, if you’re not sure what you can and can’t deduct in the first place, you’ll always pay too much tax.
Whether you use accounting software or record your expenses on paper, the tracking method is the same. You should get a receipt for every penny spent, put those receipts in a place where you can find them at the end of the month, and sort, total, and post each category monthly. Regular bookkeeping shows the IRS that you are serious about making your business profitable and can avoid being classified as a hobby industry. A hobby industry cannot take advantage of the business tax code.
Tip #3 – Hire a Qualified Tax Accountant
There are thousands of people offering tax preparation, but you need to find someone who is qualified and will educate you on current tax law. If you’re in business for yourself, skip the national chains; many allow first-year preparers to make business statements. Most tax accountants are reasonably priced and better informed on how a small business can use the tax code to increase their profits. Ask others in your profession for a recommendation.
But remember, even the most qualified accountant can do your taxes wrong if you don’t provide them with the correct information. It’s your job to learn as much as you can about what people in your profession can deduct and how to keep audit-proof records.
When you do three for three, keep track of every mile you drive, track every penny you spend, and work with a qualified tax accountant, you’ll pay less in taxes. And paying less taxes always increases the bottom line.
