Are you running your new side business as a sole proprietorship?
If yes, you should report all income to the IRS, as well as deduct the expenses you incurred for this business.
I would highly recommend using TurboTax or some form of tax software for this. You don’t want to mess this up and the small investment in such a software package will alleviate some serious pain later on.
If its not a sole proprietorship, then you might want to seek legal advice in order to ensure you and your partner are reporting the same figures and there’s no trouble for your business in the long run.
It’s not an issue registering a sole proprietorship at a small loss for a year or two, but continual losses often looks like a tax dodge and can garner IRS attention. Just be honest and you can’t really go wrong.
A mistake in telling the Internal Revenue Service about your entrepreneurial effort could erase much of your second job's financial advantage.
1. Missing legitimate deductions.One often-overlooked tax break is business use of your telephone. You can deduct any calls you make for business, plus any special features, such as call waiting, that you add for the benefit of your business.
Are you subscribing to publications that relate to your sideline business? Those subscriptions are also deductible!
A big one is mileage. "People may not think that it's worth tracking," he says. But it really adds up, especially over a year.
Tax experts recommend you keep a notebook in your car and note the mileage every time you travel for your side business.
And don't forget the home-office deduction. You have to meet some specific criteria but if you pass the test, you can take a nice deduction.
2. Neglecting your retirement fund.Make sure you maximize your retirement contributions.You get a tax deduction, and it builds your retirement fund!
Remember Self employed Retirement accounts are a great tax shelter!
If you can spare some sideline income to invest toward your retirement, one of the easiest options is a simplified employee pension (SEP).
If your side business is incorporated, you can put away up to 25 percent of the wages you pay yourself in a SEP. If you're not incorporated, then you can bank up to 20 percent of your business's net income.
3. Incorporating your business too soon.
Just having a corporation in itself doesn't save you taxes. The only reason to have a corporation right off the bat is if you have liability issues.
If you want to shield yourself from many liability issues without having to file a separate return for the business, consider forming a limited liability company..
The concept is that it provides a separate entity for tort liability and, once you build up the business sufficiently, you might not need a personal guarantee on corporate debt if you want to go out and borrow money.
4. Deducting your day job expenses. In a word, don't. Besides being illegal, you're more likely to show a loss on your side business and that could trigger an audit!
The IRS looks for people who are wage earners and are consistently showing losses on a side business.
5. Failing to designate a business credit card.Credit cards also are great for creating a paper trail. With most, you get an end-of-the-year statement that will track all of your purchases, a great log of your business expenses.
You'll be able to document expenses that you'd never be able to recall a year later.
He remembers going into an audit with one client, armed with the year-end credit card statement as well as the other necessary paperwork. "The IRS agent loved the fact that he had it all in one statement."
6. Keeping bad records. That nicely ordered year-end credit card statement is a good first step, but don't forget your other records. If your filing system is a shoe box, the pocket of the coat you wore last winter and various envelopes in your office, you need to get organized.
7. Thinking you don't qualify for certain deductions.If you have a question about a deduction, talk to a tax professional before you decide you don't qualify.
If you're making your own decisions, you are cheating yourself out of deductions that could be allowable.
Small business owners who buy office equipment with a credit card regularly carry the balance for a few months because They're savvy enough to know that finance charges on personal purchases are not deductible. What they don't know, he says, is that they can deduct finance charges on business expenses.
So collect the paperwork, put in for the deduction and let your tax pro tell you if you don't qualify.
For a lot of people, depending on their inclinations and time, this is a case where if you're making a decent outside income, it's probably worth it to have an accountant.Not only will your accountant be able to advise you on deductions, but you can also get some good advice on when you buy, or don't buy, things for your business so that you can maximize your money.
