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Small business tax strategy

post #1 of 11
Thread Starter 
It appears I have a small business on my hands. I have been doing freelance computer work this year and generated enough income by it that I will have to declare it. I suddenly realized yesterday that I might have to do some quick year-end tax planning to avoid giving away a lot of the money I earned to the war machine. I was thinking of buying a new laptop as mine is not really the best for what I use it for. If expensing it right now will save me having to pay that money in taxes, it would be a good idea for me to buy it in the next week, right? Is there anything else I can expense, if I haven't been paying by company check? Does that matter? I use my car for business, but it's not owned by the company. Can I deduct maintenance, mileage, etc.? I've never itemized a deduction before, so I will have to figure that out. I know someone here will have some tips. Thanks.
post #2 of 11
J, Congradulations on making some extra scratch, especially if it was enough where you felt you needed to report it. I'm helping my friend, and all the money went to taxes. Not that I'm recommending such a strategy, but couldn't you simply underreport your earnings if its free lance? Yes, you can deduct mileage, etc., if its for business. However, its still limited in that you can't deduct the full cost of it either. And, if you have a vehicle that's a piece of junk, you might consider donating it this year before they change the tax code for donating your vehicle.
post #3 of 11
Congrats J. Starting your own business is fun, I've done it before and are familiar with some of the questions you have. For instance getting a new laptop (should be top of the line, with all the extras, cause you NEED them, right.?), is a no-brainer to deduct, that one is not even questionable. As for the other more "can I get away with this" type questions I'd recommend going to a financial consultant. Mine charges $125 per hour of billable time, he does my taxes corp and regular as well. The money spent is well worth it. I did my own bookeeping as well, which limited his time. It shouldn't cost you more than 2K per year, which isn't much. If you need some more advice, send me a PM.
post #4 of 11
BTW, new business don't have to declare taxes for 18 months after opening up, plus it's not unusual for a start up to show no profit, or even a loss for the first 3-4 years, so expense away, but consult a professional first so you don't end up like those Enron goons.
post #5 of 11
Quote:
avoid giving away a lot of the money I earned to the war machine.
post #6 of 11
Thread Starter 
Thought you might like that, Steve. Thanks for the replies, Esquire & Mike. I figured it out, and loosely speaking, if my income would be taxed at 25%, I should spend 1/3 more than I ordinarily would on things I can expense, because otherwise that money is gone. So I have lifted my budget on the laptop. Also I will probably go through all the receipts I have for computer related stuff from this year and write some of that off, because it was bought for business. I am interested in what you mean by "new businesses don't have to declare for 18 months". I am a sole proprietorship right now, though I will incorporate ASAP, but I have had the business license since 1999 or 2000. Just hadn't used it for anything until this year. Can you point me to more info about this rule?
post #7 of 11
You really should speak to an accountant (or perhaps lawyer) who is an expert in small business matters. "I'll incorporate" in itself is not such a simple thing as you need to consider whether to form your business as a C-Corporation, an S-Corporation, an LLC, an LLP, a professional corporation, etc. This link might help on the tax side. The tax issues can be complicated, especially when it comes to deductions and depreciation. http://www.irs.gov/businesses/small/index.html
post #8 of 11
Quote:
I am interested in what you mean by "new businesses don't have to declare for 18 months". I am a sole proprietorship right now, though I will incorporate ASAP, but I have had the business license since 1999 or 2000. Just hadn't used it for anything until this year. Can you point me to more info about this rule?
I know that when you form an S-corp, you don't have to declare taxes for the first 18 months in after incorporating. This may or may not apply to you. These questions and smaller details should really be sorted out with a qualified financial consultant.
post #9 of 11
J, If your company owns the vehicle or you use a vehicle in business, you can either deduct 37.5 cents for each mile driven for business purposes or keep track of all business related expenses and deduct that amount. And, professional fees can also be deductible. So, the amount you pay for attorneys, tax professionals, or consultants to get incorporated get deducted. I'm not sure if you could get an S corporation. You must met certain requirements set out by the IRS to qualify for it. But, its better than an standard C corporation: you get taxed the same as a partnership while enjoying the privilege of limited liablity.
post #10 of 11
Thread Starter 
Thanks everyone. I will talk to my lawyer tomorrow and see what he says about incorporation. He's undoubtedly done it for himself as well as many others, and he hates taxes, so he'll probably have some good advice for me. I ordered my laptop today, so I will have at least some legitimate expense to deduct. I also got a couple of books on finance and taxes for small business, and I've been reading a lot online. Apparently (since we are discussing the car) transportation deductions are a favorite thing for IRS audit programs to flag and check out. I might deduct mileage, but that will be all for the transportation as I don't want to go overboard. I will be honest and as thorough as possible, but most importantly I want strategies to avoid an audit. "I just want to fit in." - Patrick Bateman
post #11 of 11
I'm not a CPA (but my brother is), and occasionally I've had to report income from consulting. Check with your lawyer on the laptop--my understanding is that you have to use it exclusively for the business in order for it to be deductible (much like the deduction for a home office). Also, deductions for business have to be for things that you would not otherwise purchase (for example, even though I teach about television and routinely tape things to show to my classes, I cannot deduct my cable TV bill).
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