The last thing most people think about when starting a business is doing taxes. But proper planning will make doing your taxes much easier – and keep the IRS happy!

Here are 3 simple tips for keeping proper records:

1. Whenever you buy anything for your business, keep the receipt!

Not only will this make record keeping a lot simpler, but if you are ever audited (having your tax return reviewed in detail by the IRS), you can prove your expenses, and save yourself money.

2. Write down all your expenses and income as they happen.

As your business grows, you’ll have more and more activities to keep you busy. The last thing you’ll want to do each April 15 is to organize your records for the year. So, it’s a good idea to write down all your financial activities as they happen. You’ll find preparing your taxes will take much less time if you are organized.

3. Learn how to save money on your taxes.

As you learn about taxes, you’ll find that there are many deductions (expenses that reduce your income, and therefore your taxes) you can take that are not obvious. When using your home office, you may be able to deduct (at least partially) repairs you make around the house, utilities, your home’s value at the time you start your business, and more.

The more you know about taxes, and the more organized you are in keeping records, the more time and money you’ll save at the end of every year!

What happens if you don’t keep proper records?

Individuals with small businesses are the most likely to have their tax returns audited by the IRS. If you don’t have a receipt, you will likely lose the deduction and owe the IRS money.
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Concerned about the high cost of healthcare? Worried that your insurance doesn’t cover all your costs? Fortunately, a partial solution may be just around the corner. Since January 2004, taxpayers have had a tax savings tool called Health Savings Accounts, or HSAs. These HSAs may solve many of your healthcare cost problems.

How an HSA Works

In a nutshell, HSAs work like this. You buy a specific type of major medical, or catastrophic coverage, insurance called a High Deductible Health Plan. (This special HSA-compatible insurance is also known by the acronym HDHP.) Then, you annually contribute up to roughly $5,100 for a family and up to $2,600 for an individual–to a special health savings account. (Note that slightly higher deductions are available to taxpayers over the age of 55. Also, annual deductions are indexed for inflation.)

How You Save Taxes with HSAs

HSAs work because you get a tax deduction for the money you contribute to the health savings account. However, as long you spend the money in the account for eligible healthcare expenses—pretty much anything reasonable—you aren’t taxed when you withdraw the money. Note that HSAs deductions are not limited by taxpayer incomes.

In effect, the HSA makes all or most of your uncovered healthcare expenses fully deductible. This is a big deal because for most people, healthcare expenses are not deductible.

Just to put the value of an HSA into perspective, a family can save from $500 to as much as $1750 annually in income taxes by using one of these accounts. The final savings, predictably, depend on family income and the state where the family lives.

One other thing. Don’t confuse HSAs with the old style Flexible Spending Accounts, or FSAs. With FSAs, you lost the money you didn’t spend by the end of the year. With HSAs, you don’t lose the money. The unused balance just carries forward to the next year.

Aren’t Medical Expenses a Tax Deduction Anyway?

No, not really. For most people medical expenses are not a tax deduction. Here’s why. Healthcare expenses do count as an itemized deduction for people who don’t use the standard deduction. However, only the portions of one’s healthcare costs that exceed 7.5% of adjusted gross income get deducted. That means that most people never get to use their healthcare costs as tax deductions because their healthcare costs don’t cross the 7.5% threshold.
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