Working World

Starting your own business can reduce your financial liability come tax season. Whether you're going into business on a well-financed startup, or simply starting a small company from the comfort of your own home office, hundreds of tax deductions exist solely for the purpose of helping new entrepreneurs get their venture off the ground. Here are a few tips to guide you along the way:

Invest in an accounting system. Whether you decide to use online accounting software or hire a CPA, you'll need a bookkeeping system that allows you to track your cash receipts, business expenses, payment disbursements, asset depreciations and employee compensation amounts. The system you choose isn't nearly as important as making sure it's a system you find understandable and easy to use.

Keep meticulous records. It is imperative that new entrepreneurs keep detailed records of all their business transactions. Items such as receipt books, invoices, bank deposit slips, canceled checks, travel receipts, and proof of when and how you acquired any business-related assets need to be organized, filed and kept in a safe place for three to seven years.

Look for lesser-known deductions. Most people know that they can deduct the money spent on office supplies and advertising, but far less is known about deducting expenditures that are not explicitly outlined by the IRS — including deductions for a vehicle, business travel or home office — that are generally acceptable to take if the costs are "ordinary and necessary" to the operation of your business.

Create separate bank accounts. Even as a sole proprietor of a home-based business, you will need to keep all business-related receipts separate from any documents related to your personal or family expenses. This will make it easier to prepare your tax returns each year, and also to prove the validity of those business expenses if you are ever audited by the IRS.

Don't forget your home office. Just because you work from home doesn't mean you can't deduct office-related expenses. As long as you use your home office "exclusively and regularly" to meet with customers and as your principal place of business, you may deduct a portion of your mortgage or rent — based on the size of the office, which must be measured and documented — from your business taxes.

For more specific federal tax limitations and regulations, check out the IRS website.  

Stephanie Miles is a freelance writer living in New York City.