Tax Efficiency Tips for Small Business Success
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Track Your Expenses
Receipts are like free money when it comes to taxes. Many of the receipts that you acquire over the year are for goods and services that can be deducted on your taxes which offsets taxable income. Of course, it is a hassle to hang on to small pieces of paper all year so try an app such as Shoeboxed, Expensify or Veryfi. This will allow you to keep proof of each deduction you are owed without having to worry about 1000 little pieces of paper being lost. Along the same lines as keeping receipts and probably more important is tracking your expenses. Find a method to keep up with logging and categorizing your expenses on a regular basis and stick to it. It will make things much easier in the long run.
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Separate your Admin Time vs. Profit Time
When you are starting a business, you don’t want to lose time that you could be spending actually making money. However, there is value in the admin side of the business. Tracking expenses, documenting procedures and collecting data can be a very valuable tool. Selfishly, this data will help construct a good P&L that helps us when preparing your taxes, but it is good information to have as a business owner. If you know that you spend more than you make every April, why not plan a trip for that month rather than in the fall when business picks up? Knowing the data and using it can help grow and streamline your business. If this specific tip seems valuable to you, read a few more like this one in another article here.
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Keep Business and Personal Finances Separate
A common mistake of many small business owners is commingling business and personal funds. It makes it easier to manage your books and get deductions when tax time comes but that isn’t the most important part. If you are ever audited by the IRS, you want to be sure you can produce legitimate documentation for all of the expenses you have claimed. If an entity or individual makes a claim against your business, comingling of finances may put your personal assets at risk as well. Keeping finances separate helps with accuracy and transparency, better cash flow management, risk mitigation and easier tax filings. Some corporate entities are required to keep this separate. For other small business owners, this is simply a good practice.
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Consider Deducting a Home Office
A lot of small businesses operate from their own home. That’s how we started at Molen & Associates! There are major advantages to working from home and not having to worry about the overhead of a physical office space. However, if you do have a physical office you still may be able to deduct a home office on your tax return. Most people already know this, but the reason it made it on our list is because most people do not know that you can deduct portions of the expenses related to insurance, mortgage interest payments, repairs and utilities such as internet. You do need to determine what portion of these expenses are related to the running of your business, but it can be a nice perk when tax time comes. The home office deduction may not save you a ton of money by itself makes it easier to deduct business miles when driving away from your ‘office’ vs. your home.
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Take the Auto Expense Deduction
If you are using a car for your business, in most situations you can deduct car expenses. There are two different methods to do this: Standard Mileage Rate or Actual Car Expenses. For the standard mileage rate, all you need to do is log or track your business miles. You then get a deduction greater than 50 cents a mile for things like wear and tear, gas, and maintenance without the hassle of keeping all those receipts. For actual car expenses, you are allowed to write of the actual cost of all your gas, maintenance, insurance, and potentially write off the cost of the vehicle over time – however you must keep all receipts business and personal, and the deduction is prorated based on the business percentage. The standard mileage rate is simpler, and many get more benefit over time with it, but some (like tow truck drivers or 18-wheeler owner operators) gain significantly more benefit from using actual expenses. This can get tricky so feel free to call or email us to talk to a tax professional.
Clark Boyd
General Manager
