Want to save in taxes? Keep detailed records of your business activities

Sole proprietors, Single-member LLCs, and DBAs all report self-employment income on Schedule C. Schedule C is used to report your gross sales and all business expenses. When filing your business taxes its important to keep in mind that you pay taxes on your net income, which is why its important to keep detailed records of your business activities.
Self-employemnt income is subject to self-employment taxes. As a employee has taxes withheld out of their pay on a regular pay basis, any income reported on a Schedule C is commonly required to pay self-employed taxes on a quarterly basis. Let’s say you are a lawyer, but you have a property you rent out and thus receive rental income. There is a way you can avoid self employment taxes on your rental property, since you are not substantially involved in real estate activities as your primary business you can choose to report that income on Schedule E. Reporting your rental income on Schedule E can help you save money by avoiding the extra tax, you would only be subject to federal income tax.

Deductible Business Expenses

The rule of thumb is that a business expense must be both ordinary and necessary to be deductible on your business taxes. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. The following is a list of some common expenses’ deductible for business tax purposes:

  • Payments to employees or contractors for services related to the business
  • Rent
  • State and Local taxes & licenses
  • Insurance
  • Books, trade journals, newspapers, and publications for the taxpayer’s trade or profession
  • Dues to a professional organization, chamber of commerce, membership fees that help the taxpayer generate business
  • Regulatory fees
  • Equipment, supplies, and safety equipment
  • Internet and computer fees
  • Separate business telephone
  • Advertising
  • Legal and accounting fees
  • Cost of meals related to the conduct of business purchased from a restaurant
  • Traveling costs incurred while away from home on business
  • Transportation from one job to another if the taxpayer works at two or more locations in one day
  • Uniforms specifically for trade or business
  • Business gifts (but only up to $25 per recipient)
  • Postage
  • Office supplies
  • Interest on business loans
  • Repairs and maintenance

A taxpayer cannot deduct personal, living, or family expenses on Schedule C. However, expenses that are partially used for business and personal, only the business portion of expenses may be deductible.

Start-Up Business Cost

There are, in general, three types of costs that must be capitalized: (1) business start-up costs; (2) business assets; and (3) improvements. A taxpayer may elect a limited deduction of up to $5,000 for start-up expenses paid or incurred to acquire or to create a new active trade or business. This amount does not include expenses incurred in connection with the expansion of an existing trade or business. The remainder of business start-up expenses, if any, are capitalized and allowed as a deduction ratably over a 180-month period beginning with the month in which the active trade or business begins.

Costs to improve, restore, or adapt a unit of property to a new or different use must be capitalized. Materials and supplies used to improve a unit of property are generally deductible in the year they are used or consumed in the taxpayer’s business operations. Materials and supplies is defined as any component acquired to maintain, repair, or improve a unit of property that is not itself part of the unit of property, and any unit of property, including fuel, lubricants, and water, with an economic useful life of twelve months or less

Bookkeeping Requirements

The law does not require any specific recordkeeping methods. . The taxpayer can choose any recordkeeping system suited to the business that clearly shows the taxpayer’s income and expenses.

The type of business the taxpayer is in affects the type of records he or she needs to keep for federal tax purposes. The taxpayer should set up a recordkeeping system using an accounting method that clearly shows the taxpayer’s income and deductions for the tax year. If the taxpayer has more than one business, the taxpayer should keep a complete and separate set of records for each business.

You must also have documents supporting the accounting entries made. Purchases, sales, payroll, and other transactions generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, canceled checks, and account statements, . It is important to keep these documents because they support the entries in the taxpayer’s books and on the taxpayer’s tax return.

If you need a Bookkeeper to keep your business organized, recording all business transactions properly and keep you knowledgeable about the financial position of your business, we offer affordable monthly bookkeeping plans to help your business grow profitably.

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