Crucial Small Business Tax Tips for Starting Your Own Business

Tax tips for small businesses can be very beneficial to business owners (remember, every little bit helps). Many business owners rely on their CPAs to be innovative and come up with some unique ideas to support their business. I interviewed one CPA who came up with a boatload of ideas you need to know about.

Mike Piper, accountant extraordinaire and brain genius behind Oblivious Investor, is the man I’m talking about. Over the course of the interview, I learned how vital a basic understanding of taxation is for the self-employed. In fact, this basic understanding can mean the difference between business success and failure.

I also take this issue really personally (maybe I need to talk this over with a shrink). As you know, I got some pretty crappy advice when I was a kid. I had to rely on my dad’s accountant and broker for advice after my father’s accident. The advice was self-serving and terrible. While that CPA did end up spending time in the slammer for screwing other people out of their money, that didn’t help me.

I really dislike it when professionals don’t show up for their clients. This is why I want you to be informed and ask the right questions. This is important regardless of whether you run a huge business or are just starting to look into easy to start businesses for college students. Your CPA might not end up a jailbird, but it’s vital that you understand the basics so you don’t get sold a bill of goods.

OK. Enough. Let’s talk turkey. Here are a few gems I picked up from Mike:

First, it’s crucial to set your business up correctly.

Should you set your business up as a sole-proprietor? An LLC? Professional LLC? An S or C-Corp? This decision will have far-reaching consequences on how much tax you pay and how much liability you take on.

Folks with modest incomes might stick with the sole-proprietorship model, but they take on limitless business liability if they do. That can hurt. Small business liability insurance doesn’t cover every risk. On the other hand, other forms of business limit your liability and save you tax money. However, these are more complicated and lead to higher accounting expenses.

Did I learn which business entity is perfect for the self-employed? Nope. According to Mike, it really depends on your situation. These kinds of conversations are best handled between you and your tax preparer.

So, if you’re going to talk to your tax expert anyway, why bother learning this tax stuff?

As I said, you can’t afford to pay the price for your tax preparer’s mistakes.

Even if she’s a law-abiding CPA, don’t expect your tax preparer to be proactive. As a rule, accountants aren’t. They don’t like giving advice. Also, I hate to break it to you, but your accountant has 500 other clients to worry about and may not have time to think this question through as much as you might. You have a lot more at stake. You need to have a basic understanding of this issue so you can have an intelligent conversation about it when you talk to your accountant. You want to ask smart questions rather than just accept what you’re hearing.

Don’t get me started again.

So how do you get that knowledge? Well, Mike has an answer for that too.

He’s written a series of books about these types of issues. All the books are written in plain English (no legal jargon) and all are less than 100 pages. All righty! My favorite two are the Surprisingly Simple series. Here are a few of the topics he covers:

Business Taxation 101: A brief primer on tax topics in general, especially as they apply to businesses.

Home Office Deduction: How to ensure you qualify for it and how to calculate it.

Estimated Tax Payments: When and how to pay them, as well as an easy way to calculate each payment.

Self-Employment Tax: What it is, why it exists and how to calculate it.

Business Retirement Plans: What the different types are, and which one is best for you.

Numerous Business Deductions: Several deductions explained in detail, including how to make sure you can qualify to take them and how to maximize them.

Audit Protection: Learn what records you need to keep (and how long to keep them) in order to protect yourself in case of an audit. The last thing you need are IRS audit flags.

Not bad when you consider he does it in under 100 pages.

Another tip often overlooked by self-employed people and their accountants comes into play when you think about retirement plans. Even if you have a full-time job and are covered by your employer’s retirement plan, you may be eligible to create an additional retirement plan if your side business is profitable. This is a huge deal because it allows you to sock away big bucks (tax-deferred) for the future. It can mean the difference between a wonderful and weak retirement down the road.

These two issues are huge, and unfortunately many self-employed folks simply outsource thinking about these decisions and defer to their CPA’s. In essence, that is the reason why Mike wrote his books.

The last tip I’ll share with you is Mike’s suggestion that we do our own taxes by hand one year. He didn’t suggest that you actually turn it in to the IRS, but he did emphasize how much we’d learn simply by going through this process. It does sound like a really smart idea…but I don’t think I’ll be doing it. My situation is kinda complicated and I don’t want to spend the time.

However, I’m glad I read Mike’s books. I feel empowered to have better conversations with my CPA next year. What do you think? Does it make any difference how much you know about taxes? What have you done about it? Got any horror stories to share about CPAs?