Frequently Asked questions
A: There are numerous laws and exceptions, as you might guess. I recommend following this general principle: If the intent of the expense is to make more money in your business, then it is probably deductible. Tax agencies want businesses to make more money so they can collect more tax revenue. If you are purchasing materials to make your product, paying bills to “keep the lights on,” or investing in business infrastructure or relationships, it’s likely deductible.
It is essential you document your expenses, which should be part of your regular bookkeeping. If you have a run-of-the-mill utility payment, saving the bank statement which shows it should be enough. If you have an unusual or large expense, it’s a good idea to save a copy of the receipt. If you’re ever audited, they will want to know what the expense was for and why you needed it for your business.
When in doubt, research or ask a tax professional. Things like business use of personal property can also be deductible but may not be as simple as putting it on your business credit card.
A: The main forms used to operate follow, with the most likely reasons an owner would choose them:
Sole Proprietorship: This is common at the start of a business. It means there is no legal entity. You are operating the business as an individual and will file your federal taxes on Schedule C under your social security number. It is the simplest and cheapest option, but you will pay high taxes, and your personal assets are at risk to your business’ liability.
Partnership: This can be thought of as a sole proprietorship with multiple owners. It’s a little more complicated, and there is a distinction between a “general” and “limited” partnership. It is rarely the best option, but if you are starting a business with other people and aren’t confident it will succeed yet, this can be the simplest option.
Limited Liability Company