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If you’ve been an entreprenuer for more than a year, then you know a little bit about how big of a bite taxes can take out of the unprepared business owner. When you have a regular payroll job, the employer takes care of a lot of taxes for you. In addtition, they handle most of the administrative hassles as well. As an employee all you have to do is fill out a W-4 form and then wait for the payroll department to take out whatever the government asks for based on your number of deductions and claimed withholdings. For the small business owner, things are much more complicated.

First, there is no withholding. You have to pay into the government via quarterly payments. Second, what non-business owners don’t realize is that those taxes they see disappear out out of their paycheck each wee are only half the story. For every 7.5% they take in FICA from an employee paycheck, the employer pays another 7.5%. When you are self-employed, you are on the hook for the whole 15%. Add in Medicare, State, and any local taxes and most business owners turning a profit are looking at a 50% tax hit. Luckily, there are some ways to reduce those taxes.

Remember Only YOU Can Prevent Too Much Taxes

I don’t have a cartoon tax bear to help here, but it’s true. Many entrepreneurs rely entirely on their friendly accountant to handle all things tax for them. While this ensures that you are in compliance with the law, it does not minimize your taxes. Too many business owners make the mistake of assuming that tax planning is nothing more than holding on to your receipts all year and then handing them over to an accountant or plugging them into TurboTax. Don’t make this mistake.

It is up to you to understand your taxes and how to help make them lower. You probably already know the basics, things like recording your mileage and saving receipts from taking clients out to lunch. But, there is much, much more you can be doing.

Plan For Taxes Year Round

Seriously, a 50% tax rate is a nightmare. Bust your butt all year long to build a successful revenue stream just to flush half down the drain. It almost makes you want to go back and work for The Man. You need to be playing this game and dodging the bullets year round.

The first thing you want to understand is your tax responsibility when it comes to quarterly payments. When you worked for The Man, it was taken care of by withholding your taxes from your paycheck according to a table matched up with your W-4. For the business owner the rules are a little bit different. Basically, if you underpay over the course of the year, the IRS will ding you with substantial penalties and interest. After all, it’s no secret the government is not very responsible with those tax dollars. They can’t wait until April 15th next year to get more income. Servicing all of that debt and ongoing spending require massive inflows of cash. They get them by requiring people to in pay all year long.

So, how do you know how much you have to pay over the year? The answer is that you have to pay 85% of whatever your total taxes will be for 2008. See a glitch? In order to know your taxes for 2008 you need to know your reviews and expenses for 2008. Don’t get me wrong, I plan ahead, but I’m not magic. (I’d be in a whole other line of business if I was.) Fortunately, there is a second way. If you pay in 100% of the previous year’s taxes then you are considered “safe” no matter how far off you are on this year’s taxes. This can be a big advantage when your business is growing fast. If you paid $10,000 on $100,000 of revenue last year, and things are going so well that you fully expect to clear $500,000 this year, you are still in the clear as long as you pay $10,000 in 2008. Unfortunately, you can’t just wait until the end of the year either. That’s why your accountant makes you pay quarterly. Quarterly is the lowest allowable frequency.

Theoretically, you could pay in each quarter only the taxes you owe on that quarter’s taxable receipts. Of course, in order to do this you also need to determine that quarter’s tax deductions including breaking up any annual deductions into fourths. Obviously, this is a nightmare for you and your accountant, so unless you have the kind of business that only makes money during the end of the year (Christmas ornament shop) don’t even consider going this route. Instead, the “safe” system is to divide the 100% of last year’s taxes by four, and make equal payments each quarter.

Although the amount you are paying is mostly set, that doesn’t mean you should stop tax planning. Saving receipts is good, but taking it another step will ensure a lower tax bill come next year.

Business Only

A mistake many business owners make is to assume that if they “bought it for the business,” then it is deductible. That is usually true, but there is a catch. You want to make sure that your business purchases are used 100% for your business in the year you buy them. There is a special small business deduction that allows you to take a full write-off all at once during the year you buy equipment instead of depreciating it over time which results in a much lower deduction this year. The catch is that it has to be used 100% for the business during the year it is bought. If your daughter uses that laptop for one week during finals, you’ve lost the ability to take that deduction.

I always get asked, “How can they tell?” Truthfully, they can’t but, it has be reasonable for you to both claim and defend the 100% use. So, if you buy a new computer, don’t load games or let your kids do homework on it. Don’t save recipes or balance your checkbook on it either. In fact, take pictures of your kids and spouse using the OTHER computer so that you have proof. Also, do not throw out or donate your old computer until after the end of the tax year so you can claim that it was the “personal use” computer.

The good news is that after that first year (not 12 months, but through December 31) the item only has to remain 50% used by the business in subsequent years. The catch though, is that it must remain at 50% or more use through the full time it usually takes to depreciate. So if that item normally has a 7-year depreciation schedule, then you have to keep it around for 7 years. Don’t give the IRS ammunition by buying a “business” computer and then two years later writing off the same computer as a donation to charity. Make sure you keep the computer in your business premises until the depreciation period is over, even if you have to stick it in a closet. Remember 50% use doesn’t mean you have to use it 50% of the time, it means that out of the use that it does get, 50% or more must be for business. So, if you turn it on to make sure it still works during business hours in your office and then put it back in the closet for the rest of the year it was still 100% used for business if no one else used it.

Mileage

You can deduct more than just driving to and from a client. Driving to the office supply store, taking equipment in to be serviced, attending trainings, and more can all be used as milage deduction. The rule is that you must have a “contemporaneous” record. That means you have to write it down as it happens. Keep a notebook, or buy one of those special mileage records, in your car. Write down the starting and ending mileage of EACH LEG of the trip. That is write the starting and end TO milage and the starting and ending FROM mileage. You can fudge this, but make it as ironclad as possible and there will be no reason to look any further should someone come knocking. I tell my clients to switch pens and ink colors each quarter when they pay their quarterly taxes and once or twice more than that if they think of it. Nothing looks more contemporaneous than writing in several inks and pencil. Your accountant can’t add to this record at the end of the year even if he discovers something, so they probably won’t even bother to say anything. It’s your job to keep the record all year.

Charity

Your business can deduct donations to charity just like you can. It is sometimes possible to deduct services performed for charity. In my writing business at ArcticLlama, I build up ties in the community by doing grant writing and other services for non-profit organizations. In order to have a chance to deduct it, you must keep track of it like a paying job. Set an hourly rate that you are donating (something in the middle of your usual rates is safest), and then keep track of the hours. If you use any materials or resources you usually charge for, include those as well. When the project is finished create an invoice. You don’t need to send it to them, just keep it for your records. Most non-profits will send you a thank you letter. Keep that with the invoice as proof that you provided the services described. Also, make sure you can produce other invoices for paying clients that contain similar charges and rates to back up your deductions. If you never charge anyone else for faxing, don’t try and write off faxing for your charity project.

Research

There are many more opportunities for year-round tax planning. Call your tax advisor now, if you have one. Now that April 15 is past, they have much more time for planning with you. If you don’t use a tax professional, go to the web site of the computer program you use, or look for books that discuss tax planning. If possible, try and get something specific to your type of business. What may be very deductible for one kind of business may be very risky or flat out illegal for another business to claim, so it pays to be specific. Avoid books with silly titles like “Pay No Taxes Ever” or “Super Secret Tax Strategies”. These books are for the unsophisticated person who wants something splashy. You don’t want splashy, you want solid. “Tax Planning for Architects,” sounds more like what you are after.

Follow the year round planning doctrine, and come December or January, your accountant will have a lot more ammunition to fight the tax dragon. You’ll thank me when you pay less next year.