April…doom or gloom?
Have you ever felt that you just might be able to run a successful business and keep your family afloat…but the government’s stranglehold on record keeping and tax filing was an anchor dragging you down? You are not alone. 77% of small business owners find tax regulations burdensome, which is a nice way of putting it.
Two issues affect us: The number/amount of taxes we pay, and the burdensome regulations we must track to compute the tax burden. It leaves us with a question: What’s left over for the person doing all the work? Not surprisingly, Forbes reports that of the top ten issues squeezing the little man, four are tax related. Federal income tax is the third most severe problem affecting business survival. It drastically impacts profit levels, which is the bread and butter of daily operation. Just how prevalent is this problem? A whopping 50% of all small businesses face cash flow problems on a regular basis.
If you are just starting out, let’s begin with the clarity of knowing just what taxes you must manage, report and pay:
1. Income tax. Federal and state.
2. Self-employment tax. This is roughly 15% of reported income, covering social security and Medicare.
3. Payroll taxes. You are required to pay more than 7% of an employee’s gross payroll, plus unemployment and workers comp.
4. Capital gains taxes on investments, dependent on the length of time assets are held.
5. Property tax if you own your business locale.
6. Dividend taxes on investment income.
Does that sound like a lot to you? It does to me! Is there any help for us? Surprisingly, the answer is yes. Let’s begin with a couple deductions that pack a punch in reducing tax liability.
Travel is huge. For many years I lived in the country and drove a lot to business meetings and trade shows where I sold my products. I had a newer vehicle with fewer repairs, so I tracked the miles I drove as opposed to actual expense. I found writing down numbers every time I got in the car very burdensome, so instead I tracked the places I went. At the end of the year I googled the number of miles and added them up. I missed a few, but it was easier for me. Now I live in town, drive less, and drive a very needy vehicle. Either way you slice it, 56 cents a mile adds up, and here’s the kicker: It is subtracted from income earned before the tax burden is computed, so it is truly worth the effort. Turbotax offers a good explanation of the ins and outs of travel deductions.
Home office matters. So many of us work from home, that calculating the percentage of an office makes the math very worthwhile. As a matter of fact, I’ve been wondering if my home office ought to be enlarged, lol. You can claim a standard deduction or itemize home office expenses, depending on your situation. Find the information on how to do this at US News. It’s an easy read and very informative.
The Chamber is composed of many members in your exact situation, and even more who can help. For example, many of us wear a dozen hats as sole proprietors, but some are experts in tax law. Seek their help. Some are seasoned veterans of the tax wars, having maintained their businesses for several years. Ask them how they track their deductions. We are not in competition with one another. We exist to help us all be profitable.
So taxes are a burden and there are deductions…but there’s more! Next week: Why tax credits matter…a lot!