Started a business this year? Looking to start one? This article by Article by Tom Stemmy for The Capital Gazette.com gives you some great tips for getting started in the wide world of tax write-offs.
As the gloomy economy lingers on, more Americans are giving thought to going out on their own in small business — if not full time, at least on a part-time basis to help pay the family bills.
Either way, there are tax implications to be considered any time someone dons the hat of a small business owner. And, for those facing tough economic times, tax breaks are helpful indeed.
Let’s say you were weighing the option of leaving the company payroll to go out on your own. In terms of the “big tax picture,” there is at least one major trade-off that will come in to play.
The downside is that you won’t have an employer to pick up one-half of the tab for your social security and Medicare tax bill. Once you are self-employed, you could wind up paying a full 15.6 percent on your net earnings for this special tax.
On the plus side, however, you will find that the tax rules for the self-employed generally allow greater flexibility for tax write-offs — not readily available to company employees. For example, generous deductions could be allowed for expenses such as business travel, entertainment, supplies, computers and even home-office expenses — as long as they are necessary expenses.
What about the tax breaks for starting a business? By keeping detailed records, you will find (with certain limitations) a wide variety of tax write-offs are available when starting from scratch. These could include the cost of exploratory travel, surveying markets, visiting potential business locations, consulting fees and supplies. Generally, you start claiming these costs as soon as you open the doors for business or start generating income.
Let’s take Mandy, for example, who is in a dead-end position as an office administrator for a small retail chain. Mandy decided to pursue her real passion, which is to become her own boss as an interior designer — perhaps only part time at first.
But, because of limited cash resources, she first needed to know if she could afford the cost of getting started — and if she could get any tax-saving benefits because of her exploratory efforts.
After some checking, Mandy found she would need to spend nearly $5,000 for various research and start-up costs for travel, design tools, software and consultants. She found most of these costs would be tax-deductible the moment her design business started — even if she operated on a part-time basis.
Mandy also learned that if she were to spend more than $5,000 for start-up costs, these costs would also be tax-deductible — albeit over an extended time period.
Could there still be tax benefits if a planned business venture doesn’t pan out?
What happens if someone decides to take a few trips, or in other ways, spend a little money researching the possibilities of starting up any kind of a business venture — only to later decide that it’s not going to work out? Whether you could be entitled to a tax write-off for these costs becomes a subjective question that, some might argue, is in the eye of the beholder. Here’s why:
The tax rules say the cost of your fruitless efforts to go into business cannot be deducted when you hadn’t made up your mind exactly what kind of business you intended to start. However, the IRS also makes it clear if your sights were already set on a “specific business” venture but it never got off the ground, those start-up costs will then be treated as “capital expenses.” That would make them eligible for a tax deduction.
The best tax advice: Try to identify your intended business venture with documentation, and make a record of every dollar you spend in your exploratory efforts. Then, ask your tax adviser how to best take advantage of this special tax write-off.