The year 2020 posed significant challenges for all of us – and said challenges are not ending with the calendar year, particularly because changes that occurred in 2020 now must be reflected in the taxes filed in 2021. This includes job losses and switches, additional jobs to supplement income, federal stipends received from the government as well as those who may have launched a new business venture.
It’s reported that more than 4.1 million new business applications were filed in 2020 (nearly 1 million more than 2019 and 2018, respectively), many of which were spurred on by previous job losses, extra time at home to innovate, and digital opportunities on the rise; as such, there will be a lot of first-time sole proprietors who need counseling on how to file their taxes this year. And of course, those who started an entrepreneurial journey won’t be receiving a traditional W-2 form – without the traditional W-2, how do they know how to file, or even where to start?
In addition, those who began a new business last year most likely launched the business remotely from home and there is quite a bit to consider due to that fact. The following are a few tips to consider while filing your taxes this year:
- Deductibles 101. It’s important to understand what can and cannot be accounted for when it comes to deductions. While work-related travel expenses – including flights – can count as a tax write-off, it’s important to note that day trips don’t count – it must be longer than the average workday. Additionally, business insurance can also be deducted, as well as office supplies.
- First-year perk. In the first year of establishing a business, sole proprietors can claim up to $5,000 in “startup costs.” This could include anything from legal counsel to bookkeeping software such as Xero. Even better, you often do not have to pay back the expenses for a few years – enough time to get you on your feet. Creating a startup cost worksheet is also recommended – your worksheet should list all the facility costs, equipment, initial supplies, advertising materials as well as miscellaneous costs you need to open your business.
- Keep your receipts. And not just for this year’s taxes. The reality is: Receipts are audit protection, and you have to take that seriously. Since the year you start your business is often the least stable, it is essential that you keep and file all your receipts for at least three years – five being the recommendation.
- Pay it forward. Small business leaders often build tight bonds with the communities they serve and because of that, their civic engagement is driven by the customers and clients they see every day. While new businesses are typically on a tight budget, giving back (even a little) to charity has two-fold benefits. First, it shows you care and are invested in your community. Second, it’s a positive way to gain positive exposure in your region. However, make sure you take into account the entity that you donate to, as that must also be considered a “qualified organization.”
- Move from a “DIY” approach to “DIT” – do it together, with an advisor. Why? Advisors are experts and can help you maximize your deductions. They can also help plan your cash flow to cover tax and avoid penalties. The tax work creates an easy platform for advisors to build upon and extend to cover ongoing bookkeeping or business guidance. Build a relationship with the right advisor who’s not just there for tax season, but who can also work alongside as you grow your business.
While launching a new business is no easy endeavor, these tips can help you save money in the long run, preserve cash flow, and protect your assets as you continue growing your business and as you approach the Tax Day.
Ben Richmond is a chartered accountant and U.S. country manager at Xero, where he is responsible for driving Xero’s growth in the region. Ben has been recognized by CPA Practice Advisor as a “20 Under 40 Influencer” and was named Accounting Today’s “Top 100 Most Influential People in Accounting.”