A whopping 82 percent of startups fail due to cash flow problems. Similarly, 82 percent of startups are self-funded by the entrepreneur or through family and friends. These two stats make it clear that entrepreneurs need to take advantage of every financial leg up they have, but many don't.
Taxes are confusing for everyone, let alone those who run their own businesses. Determining what can be deducted, deciding whether to itemize, and figuring out how to file taxes accurately and affordably is overwhelming. But within all those tax forms and regulations lie benefits that entrepreneurs can--and should--capitalize on.
With tax season upon us, it's important to find tax breaks that increase cash flow and keep your business's doors open.
1. You can deduct the cost of launching your business.
Starting a business is expensive--compiling market research, developing customer personas, and advertising the service or product adds up. And while there are financially feasible ways to do this, many entrepreneurs are competing against big corporations funneling millions of dollars or more into assessing and building the market.
Those capital expenses go toward establishing an asset (a business) that will benefit you for more than a year. Section 195 allows you to write off $5,000 of those startup expenses in the first year of the business's operation; the remainder of the startup costs can be deducted in equal portions over the following 15 years.
What counts as a startup cost? Fees paid for legal or accounting services; licenses and permits; market research; advertising; rent for office space or equipment; training and employee costs; and the cost of lining up suppliers, distributors, or financing can all be considered.
2. You can avoid end-of-year surprises or temporary tax "loans."
While some entrepreneurs aren't required to pay taxes in quarterly installments, it makes sense to: Paying in installments means you won't have to fork over a large amount come April 15, which may be cost-prohibitive or dampen business efforts you wanted to invest in. If your bill is really large, it can cripple your cash flow for the remainder of the year.
The other benefit is that you won't have the opposite problem of receiving a big refund. While most people think they would love to have the "problem" of a big refund, what that would mean for an entrepreneur is that you had loaned money to the government, free of interest, rather than invested it in your own business.
To estimate how much you'll owe, use a tax refund estimator, which can take into account your personal circumstances, income, and deductions. Seeing your estimated taxes or refunds for one tax year will help you allocate future funds across quarters, so you can go into tax season without worry.
3. You can write off expenses related to your home and car.
If you run your business from your home, you may be able to deduct expenses related to that home office, including mortgage interest payments, insurance, repairs, and utilities like internet service. Whether you own your home or rent, you can deduct the costs of maintaining your office within it; you need to calculate what percentage of your home is dedicated to running your business, including areas where other employees work.
Similarly, if you use your car to operate your business, you can write off expenses related to work. With cars, there are two deduction options: actual car expenses (such as insurance, gas, and repairs) or the IRS's standard mileage rate. If you're deducting actual expenses, you need to determine the percentage of time your car is devoted to work-related tasks and deduct accordingly.
The only caveat here is to make sure not to mix personal expenses with business expenses--keep these separate so you're not attempting to deduct expenses that don't qualify. For example, if your summer vacation was a family road trip throughout the Southwest, you can't bundle the gas receipts from that trip with your business-related car expenses.
The easiest way to keep everything separate is to use a receipt app like 1Tap Receipts or another data extraction and bookkeeping app. I've recently become obsessed with 1Tap as it captures and organizes all your receipts and invoices from emails, photos, and more. It brings everything together in one place, and the machine-learning-enabled app can understand and learn what types of expenses you have and help you separate them, so you can easily manage expenses that count as personal deductions independently from those that are considered business deductions.
Cash flow is essential to keeping a business healthy and growing. Missing opportunities to keep money in your pocket is an unintentional way of not looking out for your business's best interests. Take advantage of the benefits entrepreneurship offers, and tax season may be just a blip on your radar.