Posted on Apr 12, 2012
This guide is based on Mixergy’s course with Kyle Durand .
When he saw that a lack of basic tax understanding was going to cost his brother’s new startup tens of thousands of dollars, Kyle Durand taught him a few essential tax principles and helped him save a whopping $50,000. It was all done with smart business tax planning, so we invited him to teach you how to do it.
Kyle runs a law and accounting practice in Seattle and is the founder of TaxReceipts.com. which teaches entrepreneurs how to simplify their taxes.
Here are the actionable highlights from the course.
1. Save all your receipts to protect yourself during an audits
If Kyle’s client had saved the receipts for the meal and entertainment expenses he incurred as a lobbyist, he wouldn’t have been hit with an $80,000 tax bill when the IRS refused to accept his expenses and charged him penalties and interest.
Take Action: For all of your business expenses, save the receipts that show exactly what you purchased, and don’t count on credit card statements to satisfy the IRS if it challenges your deductions.
2. Spend in December to lower your taxable income for the year
One December Kyle’s client bought a new printer and made deposits to pre-tax retirement and health savings accounts, and he went from owing $10,000 in personal taxes to scoring a $30,000 refund for the year.
Take Action: Buy new equipment and contribute to pre-tax benefit plans in December, then deduct that spending so you pay taxes on the year’s revenue minus your December spending.
3. Track your earliest business expenses so you can deduct all of your startup costs
Kyle tracked the thousands of dollars he spent on research and conferences before he opened his law practice, and his wife advised him to start his business immediately so he could deduct those expenses.
Take Action: Keep records of expenses you incur before you formally create a business, and incorporate or start selling products to the public before those expenses reach $10,000, which is the limit on startup expenses that a business can deduct in its first year.
4. Give options, not stock so they won’t be taxed until they choose to buy the shares
If Kyle’s client had given his software developers the option to acquire equity in his $1 million company instead of giving them 2% equity, he would have saved them from having to each pay income taxes on $20,000.
Reward your employees or contractors with the right to buy stock at fixed, low prices at a later point in time, presumably when your company’s stock is worth more.
5. Set up a tax calendar so you won’t miss a deadline and have to pay fines
If Kyle’s client had tracked tax deadlines herself instead of relying on her accountant, she wouldn’t have had to pay a $46,000 tax bill, including interest and penalties on her late payment.
Take Action: Read government websites to find the federal, state, and local tax deadlines, then enter them in Google Calendar and send yourself alerts whenever a deadline is coming up.
6. Turn trips into business travel so you can deduct transportation and other expenses
Kyle traveled to Europe for business, and he was able to deduct the fare for the cruise ship he took to get there.
Take Action: When you travel outside of the U.S. for more than seven days, spend at least 75% of the travel time on business activities like meetings, and deduct your transportation, lodging, and business expenses for the trip.
7. Hire contractors, not employees to save on extra tax expenses and paperwork
Kyle says Andrew was wise to hire contractors for tasks that aren’t integral to the day-to-day operations at Mixergy because he doesn’t have to withhold taxes from their paychecks or pay half of their payroll taxes.
Take Action: Hire people as contractors if you don’t need them to work on a daily basis or at a specific time and location — and if they don’t meet the other government criteria for employees.
8. Establish a permanent business address so you can deduct travel expenses
If Kyle’s software developer client had established a permanent address, he would have been able to deduct the thousands of dollars he spent traveling the world for business.
Take Action: Get a mailing address for your business and use that address if you apply for a business license.
9. Try to make money so you can deduct your losses and save when you turn a profit
Kyle said that if a filmmaker who had a separate, full-time job had demonstrated an effort to make money from her film, the IRS probably wouldn’t have declared her business a hobby and ordered her to pay $300,000 in back taxes.
Take Action: Show the IRS you’re serious about making money with your business by setting up a designated bank account for it and trying to make a profit through sales or advertising.