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Tax season is approaching quickly… so I’ve asked CPA Kristine McKinley for some tax tips for direct sellers. What should direct sellers do right now to prepare for the upcoming tax season?

The best thing anyone can do to prepare for tax season is to have good records. If you don’t already, you should have a separate business checking account, and even separate business credit cards. If you use PayPal to collect payments, you should have a business PayPal account to use for payments and business expenses.

To keep track of your income and expenses, you should use either a software program or spreadsheets. The most popular software program available is QuickBooks, but there are many other programs available. You should update your books monthly or at the very least quarterly. If you can’t keep up with your books, you should consider outsourcing this task. It’s very important to keep good records so that you won’t miss any deductions at tax time.

Even if you hate taxes and decide to hire someone to do your bookkeeping and taxes, you should still be familiar with the tax law enough to know what’s deductible and what’s not. The following are the most commonly missed business deductions:

Automobile expenses - if you use your car for business, you can deduct a portion of your car expenses. You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (48.5 cents per mile in 2007).

Startup expenses - business expenses incurred before you actually start the business used to have to be depreciated over 5 years. Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business. Startup expenses over $5,000 still have to be depreciated (over 15 years). Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.

Education expenses - you can deduct the cost of classes, seminars and other education costs if they are related to your current business.

Travel - when you travel for business, you can deduct the cost of the
airfare, taxis, hotel, meals, and other travel related expenses. If part of your trip is for personal reasons, you may need to prorate part of the expenses. Also, if you bring your family along, only your own expenses are deductible.

Home office expense - many people choose not to take this deduction because it is considered a red flag. If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn’t not go into business because someone says you’re more likely to get audited as a small business owner, would you?). Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm. You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.

Finally, if you decide to hire an accountant to help you with either your taxes and/or your bookkeeping, make sure you hire one that knows and understands your business.

Much thanks to Kristine of Online Biz Tax Tips for providing us with these great tips. She is a Certified Public Accountant as well as a Certified Financial Planner located in Lee’s Summit, Missouri.

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