Here’s What Happens to Your Tax Refund When You Start a Business

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Starting a business could save you money on taxes. Read on to learn more. 

Starting a small business isn’t for the faint of heart. It’s estimated that 20% of small businesses fail within their first year alone.

But there are many benefits to starting a small business. For one thing, you get to call the shots and be your own boss. You might even get an opportunity to increase your income.

Starting a small business could also work wonders for your taxes. In fact, you may find that your tax refund gets larger once your small business is set up.

A small business might result in more tax savings

When you work as a salaried employee, the number of deductions you’re able to claim on your tax return may be limited. For example, you can take a mortgage interest deduction if you itemize on your taxes and own a home. And you can claim a deduction for state and local taxes.

But when you work for an employer, you can’t claim a deduction for the expenses you bear that allow you to do your job. If you have to spend $400 a month commuting to and from your office, that expense is on you, and the IRS won’t allow you to deduct it.

You also cannot take a home office deduction if you work as a salaried employee. This holds true even if you work remotely 100% of the time and don’t have a physical office you report to.

When you own a small business, you can deduct the expenses you incur to keep your venture running. And that list might be quite extensive.

First of all, any startup costs you incur for your business will generally be deductible. And if you use an accountant to help you manage your books, that’s a deductible expense, too.

You can also deduct the cost of any equipment or supplies you need to keep your business running. So let’s say you decide to start a tech consulting business. If you have to buy things like cables and routers, those are all deductible. And if you need to buy office supplies and filing cabinets to keep track of your invoices and documents, those are deductible expenses, too.

You can also take a deduction for transportation costs you incur in the course of running your business. If you have a vehicle you use solely for business, that’s an expense that’s deductible (and even if you don’t use a vehicle for 100% business use, you can generally deduct something there). And if you travel for things like conferences related to your business or industry, those, too, can serve as a tax break.

Get a good accountant

All told, your tax refund has the potential to rise quite a bit when you start a business. But it’s also important to know which expenses are and aren’t deductible. So if you’re starting a company of your own, get yourself a seasoned accountant with experience in the world of small business taxes. That way, you’ll have someone to guide you and help you maximize the tax breaks you’re entitled to.

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