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Practical Tax Advice for Creative Agencies

Douglas Kauffman, CPA Nov 21, 2019

Let’s face it, nobody loves paying taxes. Often times, it feels like your hard-earned money is just leaving your pocket for no reason.

However, there are some ways you can make tax time less painful and minimize the amount of taxes you owe.

In this video (and article below), I’ll go over some common tax mistakes businesses make. I’ll also provide some practical tips for paying less taxes.

3 Common Tax Mistakes Businesses Make

1. Making a Poor Business Decision Because of Tax Liability

It can be easy to justify large purchases to reduce your tax burden at the end of the year. But just because a purchase cuts your taxes doesn’t mean it is a good business decision. It may be a wiser choice to pay a little more in taxes and keep the rest of the money in the business.

2. Overcomplicating Your Tax Strategy

There are countless things you can do to reduce your tax bill. But should you?

Don’t underestimate the power of simplicity. It might be worth it to pay a little more to have a simple tax structure. You might pay a little more in taxes, but then there are fewer filings, fewer moving parts to track, and not as many things for the IRS to challenge in the future.

3. Prioritizing Immediate over Long-Term

It’s hard to keep the end in mind when discussing taxes. After all, who wants to deal with a hefty tax bill?

But in the long term, paying more taxes speaks to the health and growth of your company. If you are paying more in taxes each year, that means you are making more money. Showing years of profits can lead to an increased valuation or gain you better rates and terms for business financing.

Practical Tips for Paying Less in Taxes

Any business owner should be looking at ways they can reasonably reduce the amount of tax liability. Here are some bigger and smaller tips for paying less in taxes.

1. Choose the Right Legal Entity

How you set up your agency’s legal entity – whether you are a Sole Proprietor, LLC, S Corporation, or Partnership – will have the greatest impact on your tax liability.

Here’s what we recommend for an agency starting out:

  • Set up as an LLC
  • Start paying taxes as either a single member LLC or a partnership
  • As the business starts to become profitable, elect to be taxed as an S Corporation.

2. Claim Home Office & Mileage Deductions

If you are a sole proprietor, a remote agency, or just getting started, you are probably already using a part of your home as a home office. Be sure to take advantage of the tax savings offered by the IRS. Even as the business grows, and you move into an office that you rent or own, you can still claim a home office deduction if you work from home a day or two each week.

Like the home office deduction, you may already qualify for a mileage deduction on business travel with your personal vehicle. The mileage deduction can add up to significant savings – say you drive 5,000-10,000 miles a year for business; the deduction can save up to $1,000 on taxes by the end of the year. There are plenty of mobile apps to help you track business mileage; just be sure to give info to your CPA at the end of the year.

3. Evaluate Employee Compensation

As an agency owner, you should be on the lookout for ways to pay your employees tax-free instead of the standard compensation methods. Examples include:

  • Retirement Benefits
  • Health Insurance
  • Reimbursements (like cell phone or home office expenses)

By offering these benefits, you can have the money you were going to spend otherwise go further. Plus, these benefits can be a great retention tool.

Do Creative Agencies Need to Charge Sales Tax?

In recent years, there has been a lot of confusion about if creative agencies need to charge sales tax. That’s because most sales tax rules have to do with producing tangible items or physical products. Creative agencies are often providing a product – like a graphic design, video, or website – but one that’s not really tangible.

Every state’s sales tax laws are unique, so be sure to consult them and see what they consider taxable. Also remember that sales tax is a liability for your client. They should pay it and you just pass it along to the state. But if you don’t charge sales tax and the state determines you need to pay it, it becomes a liability for your business.

My advice: if you feel like you are in a gray area or are unclear on your state’s laws, then just charge for it. Most clients won’t push back on it; they will recognize and defer to your expertise.

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