Learn some helpful tips for your business this tax season.
Ah, spring. Flowers bud, birds chip and April 15 looms like a rain cloud on the horizon. For many makers, tax season is an annual reminder of the downside of running a home business. To make it less onerous, follow these tips for simpler filing and avoiding unexpected debts.
Keep your business and personal expenses 100 percent separate. If you don’t already have them, get a dedicated credit card and bank account to cover craft-related costs. If the IRS ever decides to audit you, innocent business expenses charged on your personal credit card—or vice versa—can be red flags, even if you pay them back later. Use your company card or checkbook rather than cash whenever possible; it makes tallying up expenses easier and protects you in case of an audit.
Keep a paper or digital log of business expenses. Update it daily. Tempting as the buy-it-now/write-it-down-later system might be, it often leads to forgetting some expenses and fudging others. Don’t forget to record mileage when you drive to the craft store for supplies or the post office to mail orders. If you keep a digital log, print out an updated hard copy every month in case anything happens to your computer.
Organize your receipts. Download an expense-tracking app or other software that lets you scan or take a photo of receipts as soon as you get them so you won’t feel like you’re drowning in paper. (Bonus: If you pay for a receipt scanner or app, you can deduct the cost as an office supply.) If you prefer hard copies, tuck an envelope for receipts into your purse or glove compartment, then record and organize receipts when you get home every night.
Deduct your home office or studio and related costs. If you’ve got dedicated space in your home, you should be able to deduct mortgage, utilities and other costs related to it, as long as it’s your principal workspace. The simplest formula the IRS allows is to deduct $5 per square foot of home-office space per year, up to 300 square feet, for a maximum of $1,500. You can also calculate the percentage of your home devoted to your office and deduct the corresponding percentage of household expenses.
Find the right accountant. Look for someone with expertise in small businesses and sole proprietorships. Ask fellow makers, craft shops or local crafting groups in your area for recommendations. Don’t wait until the last minute to schedule an appointment. An experienced accountant may be able to suggest long-term savings strategies, such as setting up a solo 401(k) or putting family members who pitch in often on your payroll.
Just getting started in craft sales? The IRS offers tax tips on income-earning hobbies here.