5 tax tips for young Black and brown entrepreneurs

For people of color in the United States, the racial wealth gap and discriminatory loan practices serve as unfortunate barriers for simply getting a business off the ground. In 2019, the median net worth of white families was almost eight times that of Black families. It’s a wild enough statistic in the broader sense to be sure, but becomes even more so when you consider that according to the Federal Reserve, the average gap between Black and white family’s median wealth in 2019 was $164,100. Still, over the last decade, minority enterprises made up more than 50% of new businesses and created 4.7 million jobs. Clearly, can’t nobody hold us down. Regardless of how much harder it is for minority-owned businesses to blossom and thrive, our entrepreneurial spirit persists.

Because we can’t rely on the system to help us grow our wealth, it’s important for us to tend to our financial health. How we prepare to do taxes is a huge part of that. Black and brown business owners like us have to figure out how to finagle the best results for ourselves when filing taxes — legally, of course. Getting audited is not cute. Whether you started as a freelancer a few years ago or opened a small business today, here are some expert-driven filing tips for minority-owned businesses.

Let your tax journey be a learning process

According to a 2018 national survey done by the Financial Industry Regulatory Authority, Asian-American and white test takers tended to score higher on a financial literacy test than hispanic and Black folk. This is largely because of the unique financial literacy challenges Black and Latinx folk have historically faced. I’d love to go into too much detail about the ways in which we were purposefully blocked from financial education and opportunities throughout the decades, but that’s another story altogether. We’re continuing to catch up to this day.

First and most importantly, fear and procrastination can cost you your hard-earned dollars. Sometimes when we’re scared of making a mistake on their taxes, it can keep us from acting on what’s needed until the task feels too overwhelming or complicated.

“When I first started, I had all the fancy applications and excel sheets with pivot tables and frankly, it’s not necessary,” says Veronica Díaz, a small business owner and former senior financial analyst. Her finance background has proven resourceful in the creation and running of her haircare brand. “Keep it simple until your company gains traction, using one card for your business to keep track of revenue and monthly expenses,” she says.

“Focus on baby steps,” says Shiloh Johnson, a certified public attorney and CEO of ComplYant, a technology platform for business owners and entrepreneurs looking to manage tax rules and requirements. Start early, she urges. “Don't try to take on everything at once: Make a checklist for yourself, and set a goal each month based on a year-long plan.”

Johnson says if you struggle with managing your personal money you’re more likely to struggle with your business finances as well. “As long as you’re real about the process — and yourself — you can get support where you need it,” she says.

Keep thorough records

The foundation of our tax laws in America were written by people who had all the wealth from the beginning, and still mostly do. When Black Americans and immigrant families do our taxes for the first time, we often start from scratch, as our parents are still learning the ins and outs themselves. I know I’m guilty of tossing receipts that I could’ve deducted come tax season in the past, and frankly I was never taught that as a freelancer I’m a business as well, year-round.

“Keep meticulous records when it comes to tracking expenses like those for transportation,” says Cheree Hill, a Maryland-based bookkeeper and small business advisor, adding that if you use your car for business (as I do for delivering finished paper flower crafts and handmade bouquets for my art side hustle), you may be able to deduct mileage, parking, tolls and other expenses.

“Always keep the receipts,” Johnson says, adding that there are about 169 different tax write-offs that are available to you. The deductions you can make range anywhere from automobile costs, to supply costs, or even a per diem that you pay employees when they go on trips for your business. A complete list can be found on the IRS’s webpage. “You may not always know what could be a tax write off.” Hill also suggests apps such as MileIQ to assist with keeping appropriate records for your transportation (and other) expenses.

Compartmentalize your budget

This may seem like basic knowledge to some, but freelancers in particular tend to blur our work lives with our time off. This can lead to messy bookkeeping if you’re not careful. If you were to use the same bank account to get paid for a salaried job, a side hustle, and other supplemental commissions, you’re setting yourself up for pure white-hot chaos come April. Don’t do it to yourself.

“Freelancers are still business owners, and that's something that we all have to remember,” Johnson says, urging independent contractors to make sure you’re not amalgamating funds. She also suggests that freelancers start a bank account for their business, separating personal and professional finances. Remember, she says, paid invoices aren’t the same as paychecks, since they don’t tend to have taxes deducted from them already.

Learn the basic and master them before going further

A 2020 T. Rowe price survey found that Black parents are more likely than their white counterparts to discuss finances with their children, the “value of a dollar,” and savings goals. Still, the racial wealth gap persists. This is partly due to financial literacy differences between cultures in America as well as the fact that while less white people talk to their kids about money, they have more of it to waste — a key part of the learning process.

Be resourceful and take care of your own finances instead of handing them off to someone else if possible. “Your company is probably small enough that you can afford to take the time to learn the basics,” Johnson says, adding that this includes how to categorize your expenses, sort your income, and separate your deposits. “When you are ready to hand off your accounting to someone else, you can spot inaccuracies a lot faster, and that’s the best protection.”

While understanding tax basics is ideal for a minority-business owner, you don’t have to go it completely alone. Johnson suggests finding professionals you trust to support during tax season and the rest of the year, and to start by confirming they’re credible. If they're an enrolled agent, or a person who has earned the privilege of representing taxpayers before the Internal Revenue Service, you can validate this certification through the IRS website. If they are a Certified Public Accountant (CPA), you can verify their licensure with the state you file your taxes in. “Every state makes their active licensees available to the public,” she says.

Make peace with the past and focus on the future

Business ownership and entrepreneurship are heavily influenced by an individual's savings and the wealth of their parents. Many of the richest people on the planet started their enterprises with money from their families, and while I'm sure it’s great to travel to the country estate to ask mommy and daddy for a seed investment, not everyone had that privilege.

Be realistic about your past and hopeful and (responsible) about your future. “Contribute to, or start, your retirement fund,” Hill says. In this country, Black people are less likely to retire, and further people of color in America are still less situated for their future retirement regardless of whether or not they’re saving for it, according to research in 2021 by Investopedia. As a self employed individual, there are options when it comes to saving for retirement. Hill tells me that each option provides a tax deduction and possibly a continued tax deferment. “Depending on which option you choose you may be able to save up to $55K annually,” Johnson says.

“Many underrepresented founders are from communities that don’t always have financial resources,” says Johnson, adding that a lack of resources or information can quickly turn into fear about money and taxes. If you’re a small business owner with these experiences, like I am, she suggests you and I start by making peace with where we’re at and focus on the learning process to alleviate some of that stress in the future.