Start a Business, Save Money

Posted on: May 18th, 2010 by

CPA - Financial Planner - Starting a Business - Rockville, MDStarting a business can help you save money on your taxes.  However, beyond choosing what business to go into, you also have to decide on the best form for your business: a sole proprietorship, an S corporation, a C-Corp, or a limited-liability company (LLC).  Speaking with a financial planner or CPA specializing in small businesses may help you make the best choice;  your choice will have a major impact on your taxes.  If you have children and your business is unincorportated, hire them – it will have great tax benefits.  You can deduct what you pay them, thus shifting income from your tax bracket to theirs.  Since wages are earned income, the “kiddie tax” does not apply.  And, if the child is under age 18, he or she does not have to pay Social Security tax on the earnings.

Starting a business can be quite costly; make sure you watch start up costs when starting your business.  Generally, the costs of starting up a new business must be amortized, meaning, deducted over years in the future.  But you can deduct up to $5,000 of start-up costs in the year you incur them, which is when the tax savings may be the most helpful to you.

If you choose to do your new business’ taxes on your own, make sure you don’t fall into the trap of filing certain costs as hobby costs rather than for-profit business.  If you want to file deductions as hobby costs, you still have to report any earnings as income, but there are restrictions on deducting expenses and you can’t deduct a loss.  To avoid this problem, run your activity in a business-like manner, including having a separate bank account and having business cards printed.

If you run your own businesses, you ten to have a lot of flexibility at year-end.  To push the receipt of income into the following year , delay mailing bills to clients until late in December that payment is received after December 31.  Or, pay business expenses before January 1 to lock in deductions.

If you decide to run your business out of your home, don’t be afraid to use that deduction.  You just have to use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs.  Some home-business operators steer away from these breaks for fear of an audit.  But if you deserve them, claim them.

If you feel comfortable starting the business and filing all the taxes on your own, make sure you take advantage of all your possible deductions.  If you are at a loss as to what form of business will work best for you, don’t want to be bothered with the financial planning or taxes with regard to the business, hire a respected business planner and/or CPA.  Either way, starting a business can save you money.



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