Take every deduction available when filing your taxes – be extra vigilant your first year in business.
Congratulations on your first year in business! Whether you hit your goals or not, now is always the right time to pay the least amount of tax legally owed. Not a single dollar more! Do you hear me universe? Those dollars could pay for another click on your Facebook ad or a nice, hot Starbucks coffee. What those dollars shouldn’t do is end up with Uncle Sam IF there is a legitimate tax deduction that could keep them in your (business) pocket. After all, TurboTax is constantly reminding us, “It doesn’t take a genius to do your taxes.” Be smart and consider these tax deductions before finalizing your return.
1. Using personal assets in your business.
Laptop? Desk? Blue Yeti mic? Don’t miss out on this often overlooked deduction your first year in business. You should determine the fair market value of these assets and officially place them in service in your business. Depending on the individual values you may just expense them as office expenses. Or, you can list them as fixed assets and take the Sec 179 expense deduction to still get the full deduction for their value your first year in business. Keep in mind doing this means they belong to the business now. If you later sell that laptop to your buddy because you are buying a new one, the income from the sale belongs to the business and will be taxable.
2. Not including early expenses.
Many new owners don’t have a hard cut over to being in business. This means some early expenses may not have been paid from your business account but rather a personal account or credit card. What expenses did you have on the way to being official and opening your doors for business? Expenses could include legal and filing fees, travel, and advertising to start your business. Tally up any expenses paid for with personal funds before you officially started your business. You can fully deduct up to $5,000 of start up costs with the rest being amortized. Don’t fall into the trap of thinking you didn’t spend much and don’t want to mess with it. At least spend a few minutes to verify that what you recall as not much, really wasn’t much. Oh, and since you did the checking, let’s just go ahead and take the deduction, shall we? For every dollar of expense found, about a quarter could be saved on your tax bill.
3. Recording money you put in the business as income.
While this isn’t a tax deduction per se, doing this will inflate your tax bill in the same way as a missed tax deduction. We want to avoid that! It may seem like a silly error to make, but if you are not using accounting software and don’t understand bookkeeping this could happen to you. It could also happen if you just turn over a shoebox mess to a tax preparer who doesn’t ask enough questions. The initial cash funds to open accounts (or, later the “my business account balance is getting kinda low” funds) could end up in revenue rather than on the balance sheet as owner contributions where they belong. Review the detail of your revenue to make sure every transaction making up the total is truly sales/revenue and belongs there. Paying taxes on money YOU put into your business is just plain crazy!
4. Tracking mileage.
It may seem petty and small. But, it’s your tax dollars, right? Don’t get me wrong, I’m sure the IRS would have no objections if you overlooked this and just didn’t deduct anything and in turn paid more in taxes. I cry a tiny bit inside whenever I have a client who doesn’t want to bother with mileage. Yes, yes there is the issue of time/effort vs money saved. Which is exactly why you should use this as an excuse to get a new tech toy and app like Automatic. If you used your vehicle in your business, you can take either the actual expenses or the standard mileage rate – NOT both. The standard mileage rate for 2015 was 57.5 cents per mile. For me, it is easy to have weekly business mileage of 100 miles. Take that 100 x 52 weeks x .575 = $2,990 deduction. If you want to deduct actual expenses, you will need to figure the business mileage % by taking the business miles divided by the total miles driven for the year. You can then deduct the business % of your total expenses. “I always keep my gas receipts,” said no one, ever. This alone is a great reason to use the standard deduction. But, while you are putting in the work, you should run the numbers both ways to see which one will most likely give you the best deduction now and in future years. Check out IRS Pub 463 for more information than you probably care to know.
5. Home office.
Don’t be afraid of the home office deduction! Some people still believe this is a red flag for an audit. File an accurate tax return, keep receipts to substantiate your expenses, and there is nothing to be found in an audit. If you meet the requirements for the home office deduction, please take it. It truly is that simple. Don’t feel like digging through your housing and utility bills to come up with your actual expenses? Use the IRS simplified option to still get that deduction without all the digging. A 10×10 sq. ft. office used all year would result in a $500 tax deduction.
It is easy to get overwhelmed your first year…and ever after your first year. You may find out you can live with your tax bill without digging for these deductions. As a tax lady, I never want you to pay more than you should. Never. If you are tempted to pass on these deductions, I would challenge you to pick at lease ONE. Do a bit of digging and get that deduction! Be prepared – saving money can be addicting. So, which deduction will you pick?
Not sure if you started your business off on the right foot? Grab our Checklist for getting control of your business finances.
Get your copy of the 30-Day Checklist NOW!
You’ve decided you are in business. Now what? What needs to be done to put the financial side of your business in order so you can truly focus on your business? From letting the IRS know your business exists (they would find out anyway) to figuring out what to do with your Starbucks receipt from yesterday, our 30-Day Guide to Get Control of your Business Finances will help show you the way.
There are five sets of tasks that every business owner should address as soon as possible – entity selection, smart bank accounts, simple bookkeeping software, paperless filing system and government reporting. I give you step-by-step instructions and a handy checklist, to make sure you hit every point. If you power through one set of tasks each week, your business finances will be set up and running smoothly within 30 days.
The goal here is to hit ALL of these over the next 30 days. There is no higher authority requiring you to do them within 30 days. Rather, it’s a commitment you make to yourself as a very responsible (or soon to be responsible) business owner. Those who choose to tackle these nitty gritty financial tasks up front get it done, but those without a clear deadline meander along until they’ve created a financial mess of their businesses. Let’s choose not to do that, okay?
As you read through the checklist, you might identify some tasks you already know you’ll want outside help to accomplish. Go ahead and schedule the appointments (like talking with an attorney), so you don’t end up stuck waiting for a meeting. No matter what happens just don’t be overwhelmed. These items can be accomplished within 30 days. Trust me, you will be downright giddy with yourself for taking care of them from the start. Get to it!
Get your copy of the 30-Day Checklist
A lot of bloggers out there will tell you that setting up an online business is a simple task. You just figure the demand for certain products or services in a given marketplace, provide a good offer on an eye-catching website, and that’s it. As you might assume, these assertions often come from people who have never tried doing business online. Although it sounds really simple in theory, starting an online business comes with many risks and challenges.
It takes a lot of research, planning, and patience (and usually failure) to succeed in the online marketplace. It’s true that it offers a chance to do business with fewer up front financial investments and costs. However, when it comes to financial issues, there are some common mistakes that can stand in your way to success.
5 things to avoid when setting up an online business
Based on experience with online businesses, here are 5 common mistakes that even the most dedicated owners make. Go ahead and pat yourself on the back for reading about them and avoiding them.
Mistake #1 – Not separating business and personal finances
I believe you’ll be tempted to start your small business using your personal credit card and bank account. Although it seems like a simple, harmless solution at first, it can lead to some serious trouble later.
One of the problems is that you will never be able to follow where some expenses end and others begin. You’ll pay for personal expenses on your business credit card or debit card, and vice-versa. If you can’t keep detailed financial records for your business, you will never know if you are truly making profit.
The lack of clear financial records will also lead to some trouble as your business starts growing. If you ever need financial support from a creditor or an investor, they will ask for detailed records to see if your business is worth the investment.
Mistake #2 – Not preparing a business plan
Okay, let’s get real. Things are not going to go according to plan. But, that doesn’t mean you shouldn’t start with a plan! A thoughtfully crafted business plan can save you from lots of headaches and unnecessary expenses later on.
If you put your efforts into planning, you’ll be able to identify the optimal amount of money you’ll need for a good start. Your business plan will also help you clearly define the smartest ways to invest your money in order to achieve success. This doesn’t mean that you need to plan ten years in advance. Try starting with a simple six or twelve-month time-frame. You just need to have an idea of where you are going, how you will get there, and when.
When you put your business plan into action, remember not to go to extremes. Don’t expect that you can forecast every single detail, be flexible and be ready to occasionally act on your gut instinct. The other extreme you need to avoid is getting carried away by a temporary situation and ignore your plan entirely.
Corollary Mistake: It’s also easy to “over-plan”. While most people do the mistake of “winging it” and going in without any planning, some do the opposite mistake. Some try to plan every little step and detail before they get started. This is just as harmful.
You want to strike a realistic balance. Leave some space for flexibility and changing plans based on real world results. You don’t want a rigid plan that predicts everything in advance. You want a general overview, with some flexibility for changing methods and strategies based on real-world feedback.
Mistake #3 – Not planning your marketing efforts
Any good business success story lies on the pillar of reaching the right audience, in the right way, at the right time. Therefore, planning your marketing is a must if you want to leave a mark in the business world.
I strongly believe that it’s important to try various marketing tools over time. However, when it comes to online business finance, I’m not a fan of rushing into each and every new opportunity without a proper plan, as I’ve seen many businesses overpay for customer acquisition.
Marketing your business will inevitably bring a number of customers, but you have to see if a particular strategy brings life-time customer value. This means that even the smallest budget for testing the results of your efforts can help you a lot.
My advice is to divide your marketing budget to try several marketing tools. Some of them will be very effective, and others will bring less significant results. However, it’s important to find the best solutions for your business before you decide to implement a big and expensive marketing strategy.
Mistake #4 – Not keeping track of costs
Being excited about attracting new customers and making more sales, you can easily find yourself forgetting to keep track of costs. If at some point you realize that you are spending more than you actually earn (and hey, let’s be honest, THIS will happen as you start out), you’ll be forced to make some tough decisions.
Regular website-related costs, like design, hosting, domain names, and maintenance, are easy to keep an eye on. However, recurring software, apps and services can quickly eat up a lot of your monthly cash flow.$19 here and $39 there can quickly add up month after month. Make sure you are being very selective as you make purchases and that you are verifying each month that a recurring service is actually providing a benefit.
Mistake #5 – Not taking finances seriously from the start
Doing their own finances and bookkeeping is one of the most common mistakes people make when setting up an online business. Trying to cut costs, they put this commitment on their shoulders even when they have no training, nor experience in doing finances.
After a while, they find out that it can cost much more to do their own finances than it would be to get guidance from a professional. This is usually at a point where they have already done some damage that takes time to fix. Getting the right guidance upfront or outsourcing bookkeeping to an independent contractor will also give you more time and energy to focus on growing your business.
However, even if you are not good at finances and you have a professional doing them for you, it’s your responsibility to have regular oversight. You have to be able to read and understand your financial statements. It’s crucial as a business owner to know your company’s finances inside and out. After all, you own this thing!
Congratulations! You are ready to grow out of being a team of one. The eternally debated question: Employee or Contractor? Perhaps it’s a bit misleading to say that it’s a debate. As you’ll find out in this video, the circumstances govern the treatment of your new hire, not you!
Hiring: Employee or Contractor – Think It’s Your Decision? from John Johnstone on Vimeo.
If you’d like to go straight to
horse’s mouth IRS, you can get more details.
Since tax season is in full swing, I’m getting quite a few questions from new business owners who are just not sure what to do about their income tax preparation. In many cases, they have used TurboTax or something similar to prepare their income tax returns in the past. The “suspicious activity” that caused TurboTax to suspend state filing recently may already have you feeling hesitate about following the same route as in prior years. Add in the start of a new business, and you might be wondering if this is the year to seek the help of a tax professional.
Door #1 – Do It Yourself
If you have a simple income tax return and only need to file a Schedule C to report your activity for your sole proprietorship, it is very possible for you to prepare your own return. You can do this with the help of available software, either off the shelf or online.
If you have more time than money, this certainly can be the right option for you.
This can also be a good option if your business was just getting started last year, and you had very little activity. Take your time in preparing your return and keep asking questions and seeking answers as well as understanding so you know the implications of what you are reporting on your return. Most people should draw the line and seek help when a separate business tax return is required, such as an 1120S Corporate Income Tax Return or 1065 Partnership Income Tax Return. If you set up a separate entity for your business, you should have received a Form SS-4 assigning your employer identification number (EIN) as well as letting you know the income and payroll returns to be filed along with the due dates.
Door #2 – Seek Professional Tax Help
If you have a lot of questions and are less sure of what you should be doing, seeking professional help might be the best option. Heck, you might just want to spend the money and let someone else do the thinking and the work. The first year you are in business everything will be new and you are probably going to receive a lot of advice – solicited and unsolicited – regarding the best way to handle different aspects of your business. It can be exhausting to research and properly interpret the findings to your situation. A tax professional can make sure you are focusing on the right things as well as asking you the right questions to make sure an accurate income tax return is prepared. A professional will also give valuable insight into planning for your quarterly estimates for the current year. If you can afford it, the peace of mind should be worth the money. Make sure you know the cost and what is included before moving forward with a preparer.
As a CPA in public practice, I’ll admit I have a bit of a bias towards seeking outside, professional help. I always tell folks that if I didn’t prepare returns in my practice that I would be paying someone to do mine! However, all tax preparers are not created equal.
Let me say that again, all tax preparers are not created equal.
When bringing on new clients, I’ve come across prior year tax returns from ‘”tax shops” that were downright embarrassing AND inaccurate. You don’t know what you don’t know so your preparer really needs to know their stuff. Get recommendations from your professional circle and make sure the preparer is a good fit for you before starting to work with them.
The bottom line: You have to do what is right for you and your business. And, only you can determine where the value lies for your situation – saving money and spending time or spending money and saving time. Regardless of your choice, get that return filed and keep moving forward!
IRS – Free File Links
IRS – Tips for Choosing a Preparer
I made a really stupid comment to my husband the week of Thanksgiving.
I miss the days of being an employee. I could just take the entire week off, not think about work, and still get paid.
Owning my own business I don’t have such a luxury. I’m still in the bootstrapping phase of my business. While I do have an awesome employee working for me, I can’t really take the entire week off from my business.
It took less than 24 hours for me to change my attitude. My husband and I were having lunch the following day – yes, a flexible schedule is one of the perks of having your own business. My change in attitude had this response,
If I’m not happy with anything about my business, it’s my own dang fault
This is my business. I can do anything I want. I can make it anything that I want it to be. If I don’t like working the week of Thanksgiving then I need to get after it, change it, and make it a reality.
My pity party was not truly deserved. I am hard on myself and always want to be further along than I am. It’s just a part of my nature. I would guess it’s the same for most entrepreneurs. Honestly, my business is going well. I have clients I like, work I enjoy, a flexible schedule, and the endless possibilities for growth. I’m closing in on only pursuing clients in my niche which was a main goal when I started my firm. My glass really is half full.
How about you you? What do you want your business to be? Where is it falling short? Have you been deluded into the idea that you can’t actually change it? Bull crap! Snap out of it! Figure out what you want and make it happen. Isn’t that what having a lifestyle business is all about? Isn’t that why we jumped into business ownership in the first place?
I am thankful to be living in the greatest county in the world. Most days I absolutely love owning my own business. Sure, some days it can be overwhelming having ultimate responsibility for everything. But, it’s what I signed up for – it is exactly what signed up for! I wouldn’t trade it for anything. I especially wouldn’t trade if for just a guarantee of a couple weeks of vacation around the holidays. Why? What’s a little time off when I get to live my dream every day?
Oh, and I have been busy planning out the end of December so I’m working much less between Christmas and New Year’s!
Tell me, how do you overcome negative “woe is me” thoughts when it comes to business ownership?