Congratulations on taking the leap! Entering the exciting world of entrepreneurship can be fun and rewarding. If you put the right processes in place you can eventually set your own hours and maybe even take that trip to the Bahamas you’ve been daydreaming about. But before you let your mind trail off to the land of coconut suntan oil, and frosty pina coladas, take a look at the following tips to ensure that when you are finally resting seaside, you can enjoy the view without fretting over your upcoming tax return.
- Don’t Recycle
Receipts, that is. You need those bad boys. As always with finances, especially taxes, it’s important to keep your receipts, as well as details highlighting the reason for your purchase. Try the Smart Receipts app to scan and organize receipts straight from your smartphone. Thanks to technology you are officially out of excuses not to file your receipts. If you ever get audited you will thank me.
- Put Your Money Where Your Mouse is
Find the accounting software that’s right for you. Quickbooks is user-friendly and offers an online version that gives your accountant (eh hem Mandy Bankston, CPA) easy access to records. There is also a desktop version if you don’t want to spring for the monthly subscription fee. If you’re like most entrepreneurs and on the go 24/7, something mobile like Xero may make more sense. If you’re running your business from your iPad, go with a cloud-based accounting software package like Easy Books or Kashoo, which both offer iPad apps.
- Apples with Apples, Oranges with Oranges
Do not, under ANY circumstances combine your business with your personal bank account. Each account should be separate!
If your business is your source of income, I recommend 4 bank accounts:
a) Tax savings: Set this account up with a direct payment to the IRS for your quarterly SE tax payments so you never fall behind. (Yes, you have to make quarterly payments!)
b) Emergency fund savings:3-4 months’ living expenses pulled from your business account just in case.
c) Business checking: Direct funds from this account to your tax savings account based on an estimate of what is owed
d) Personal checking: Transfer from business to personal checking to make personal purchases, and to pay yourself a salary.
By keeping all of your funds organized you will avoid scrambling at year end to decipher personal expenses versus business costs. Once your emergency savings has built to a 6 months’ stash, sweep the excess funds into less liquid investments and put away money for your retirement. Okay, maybe you can allocate a small portion for your trip to the Bahamas, but that’s it! Having four separate accounts will provide clean accounting records for your tax preparer and, if necessary, da-da-DUM… the IRS!!!
- Don’t Procrastinate
In the same way that you go through your email every morning, or in the same way that you plan and schedule marketing each week, make your business accounting a habit. You should be looking at records periodically. Set a recurring alarm on your calendar: “Review books!” The frequency is up to you, but you should carve out some accounting time at least once a month, if not more.
- Get all your tax deductions, legally of course!
Many small business owners are afraid to claim “home office” and other deductions for fear it will bring the auditor a-callin’. Fear of an audit should never keep you from claiming legitimate deductions. Just make sure you keep well-organized records, and that you can prove your deductions are indeed for business expenses and you’ll be fine. Here are some pointers for deductions:
- Home office – You have one, right?! Don’t be afraid to deduct it. Make sure that your office is distinct from your living area. Whether it is a room of its own or a part of a larger space, there should be a clear line between your workspace and the rest of the home. Don’t use your office as a spare bedroom or a playroom for the kids. If you only have one computer, claiming it as the office computer will be difficult. No auditor will believe that it is not utilized for personal use as well. The burden of proof will be up to you, so either dedicate a computer solely to work or omit the computer area from your office space. Figuring out the percentage of home expenses that is deductible for your business is simple. Measure your work area and divide by the square footage of your home. That percentage is the fraction of rent, mortgage, utilities, taxes, and maintenance you can claim. Good thing you saved those receipts!
- Technology purchases – Up-and-coming businesses need to be up-to-date with their technology, and Uncle Sam does not hinder this. Under Section 179 of the tax code, equipment expenses such as computers, printers, and even company vehicles are tax-deductible, up to a certain amount. Depending on the item, you can deduct the full cost on the year of purchase, or split it between several years. You can find more information about the distinction between current and capital expenses by seeking advice from a professional. Business-related software also qualifies under section 179. So don’t be afraid to get the technology you need to perform necessary business tasks. Just be aware of the amount you can deduct under section 179 because it changes yearly.
- Travel Costs – Since travel can be necessary for business success and expansion, many of the expenses are completely tax deductible. My tax tip on travel is to write off expenses like airfare, hotel fees, car rental and mileage, and travel expenses like laundry costs. Food is only deductible up to 50%, probably because the government figures you would have to eat whether you were traveling or not.
- Remember these points when deducting business travel expenses:
- Feel free to take your family with you on your trip. Life is all about balance! Just keep in mind that only the costs for you, and only those that are business-related, can be deducted. Good luck trying to write off that trip to Disneyland.
- If you’re taking clients/customers out for a meal, those costs are 50% deductible, just make sure to write on the bill/receipt the reason for the meal. For example, “coach meeting with Jane Doe, the new team member.” This makes it easier for you to keep tabs, and easier for any auditors that happen upon your files.
- Conference fees are deductible as long as the conference is directly useful for your business. If it’s a conference related to your industry or will help you run your business more smoothly, then it probably qualifies. If the purpose of attending the conference is to earn money on the side, then it’s not as impactful to your business and is not as likely to qualify. And of course, fan conventions and other entertainment-based events do not count, even if there are lectures. Entertainment such as amusement parks, tourist attractions, and the like are not deductible. You can definitely combine business and pleasure, just don’t include the pleasure expenses in your deductions. If you are going for a business-related purpose, you may be able to write off the expense, but sometimes it’s safer just to call a good time a good time and save the write-offs for less ambiguous ventures.
- Value good advice.
Chances are if you spend enough time trying to figure out an accounting issue, you could. But the reality is, you’ve got a business to run! Considering that you’ll need to file taxes quarterly — not just annually — there should be a certain degree of urgency involved. There is great value in an accountant or bookkeeper who specializes in small businesses. If nothing more, they’ll be a voice of comfort if you receive some alarmingly confusing IRS mail. In the end, accounting isn’t really that scary. If you start off right, it can actually be fun. After all, that’s where you’re going to see your fortunes grow.
Still not convinced that accounting is fun?
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