Opening a small business can be incredibly gratifying. You can pursue your own passion. You can set your own hours and be your own boss. You can enjoy the confidence and independence that comes with being an entrepreneur.
However, managing the finances and tax burden of a small business can be challenging, especially if you don’t have expertise in small business taxation. Making sure to follow the appropriate steps and keep the correct records can save you a lot of hassle and heartache.
- If you run an LLC, make sure to keep your business and personal finances separate. An LLC, otherwise known as a Limited Liability Company, allows business owners to protect their personal assets in the event that their business is sued or faces other financial difficulties. However, if you intermingle your personal and business assets, you may lose this liability protection. The IRS will also look for this separation in the event of an audit. The best option is to open a business bank account and make sure all business income and expenses come out of that separate account.
- Track your car’s odometer and mileage if you use your car for business. Business mileage deductions can save you a lot in taxes. To take this deduction, you need to know your car’s odometer reading at the beginning and end of the year as well as how many miles you drove for business. It can be helpful to download a mileage tracking app for your phone. Doing so can allow you to easily track business mileage and your car’s odometer reading.
- Open a retirement account for your business, such as a SEP IRA. Contributing to a tax-deferred retirement account will reduce your taxable income for the year while also augmenting your retirement savings.
- Claim the home office deduction. When you use a portion of your home for business, you can take the home office deduction. The simple method involves multiplying the square footage of your home office – not to exceed 300 square feet – by $5. You can alternatively multiply eligible home expenses, such as mortgage and utilities, by the percentage of your home used for business. You do need to prove that your home office is used exclusively for business, so make sure it isn’t a multi-purpose room.
- Make sure your bookkeeping is organized and up to date. Bookkeeping involves tracking your business income and expenses. A simpler business might use a spreadsheet for this purpose, but as your business grows, it can be helpful to invest in a bookkeeping software or service provider. Make sure to review your books each month, ensuring that you are tracking all of the money coming in and going out. Doing so will also make it easier come tax time. You will know both your business income and your deductible expenses.
If you need any assistance, contact us for assistance. We have an experienced tax and bookkeeping team that can help your small business thrive.