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Are You Loosing Out? Take Full Advantage of Business Deductions

Take action now to be pleasantly surprised at tax time

As a small business owner or perhaps a currently hot plant-based or vegan startup pioneer, keeping both your company’s and your personal finances organized can be overwhelming. Getting everything in order, including business deductions, for tax season can be especially challenging, as any lost invoice, receipt, cash payment or any untracked expense may well have a damaging effect on your tax liability and could ultimately risk putting you in the hot seat with the IRS.

Despite the risks of managing your own finances, apparently more than 50% of small business owners fail to use the technologies available to help them organize their budget and expenses, with about 46% of them saying they don’t even use the services of a professional accountant.

The following are helpful tips for keeping your business records organized for tax time and making sure you are realizing tax advantages in a manner that will make filing  a little less onerous.

Keep Your Business and Personal Finances Separate

Set up separate bank and credit card accounts and use your accounting system to keep track of your business finances. You can also use an individual accounting system such as Quicken to keep your personal finances in order. This will enable you to have a better handle on cash flow throughout the year, and you will be less likely to dip into your personal accounts to cover gaps in business revenue and vice versa. Separating your business expenditures and revenue will save you time and make tax season much less daunting.

Use Accounting Software 

Although it might be a scary thought, consider using one of the simpler packages to get started such as QuickBooks, Xero or Odoo. Your particular business model will dictate the best package to choose.These systems allow you to connect to your bank account and categorize your business expenses as they hit your bank. You can also capture and save copies of your receipts. When you are ready for more financial data and reporting, these systems can also provide a robust set of reports, as long as you’ve set up and used your system properly.  

Get Professional Advice

Whether you’re a numbers person or not, connect with someone who clearly is. Better still, someone familiar with the particular space you have chosen to work in such as plant-based foods or a niche sector like vegan leather or cosmetics. Ask them for suggestions and use them as a resource to avoid the pitfalls as you get set up.  If you have an accountant ask them.  If you have bigger plans you might what to consult with an outsourced financial specialist.  The numbers need to be right from the start, particularly if you are going to be looking for investors.

Set Money Aside For Taxes

It is a good rule of thumb to set aside at least 25% of your net income for taxes purposes. You can use these funds to make your quarterly federal and state estimates for the year with any balance being available to pay with your tax return filings. Don’t get caught up in telling yourself you’ll make it up next quarter. It’s easy to spend the money if you have it, however it’s not actually yours and the last thing you want to do is find yourself stressed over penalties and an expense beyond what you can pay.

Know What You Can Deduct

What does the IRS consider startup costs and tax deductions?  Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Advertisements for the opening of the business. Salaries and wages for employees who are being trained and their instructors.

If you’re self-employed as you grow your business, it’s important to review what you are allowed to deduct each year to make your business as profitable as possible. 15 Tax Deductions and Benefits for the Self-Employed

Don’t Overcomplicate The Process

There are about ten line items most companies need to track for the IRS. Starting with the end in mind, pull out the tax form that applies to your business, choose the categories that apply to you and lump expenses in those buckets as the year goes. You can set up sub-categories in your chart of accounts as your accounting system has a purpose beyond just filing tax returns at year end. 

Keep your books up to date and close regularly

Review and close your books on a regular basis, monthly or quarterly, whatever makes sense for your business. Your accountant can provide you with a process that officially closes the books with a full reconciliation of balance sheet accounts and provide monthly/quarterly profit & loss statements to keep your scorecard throughout the year. When year end comes along, it will be just like any other closing. 

Use A Cloud-Based Tool

Managing payments across vendors and customers can be tedious. You might be surprised at how many small businesses are managing these mission-critical processes offline. Yes, on paper. Digitizing payables and receivables will eliminate costly and antiquated check payments, reduce time and errors inherent in a manual system, keep records and provide timelier insight into the business. Quickbooks is one of many popular accounting systems with access available completely in the cloud, which will give you access everywhere.  So take the time to make the right choice for you and your business. 

Don’t Overlook your reporting requirements to others

You may be required to report certain payments made to vendors and independent contractors on IRS Form 1099. You could also be required to file IRS Form 3921 if the Company’s Incentive Stock Options were exercised during the year. Pay attention to the rules, cut off amounts, filing rules and due dates. Software such as QuickBooks and Carta can assist with these filings. 

Closing Thoughts

In summary, organizing your accounting system and processes will save you money and time while making your business more successful. Perhaps even more important, getting organized and staying organized will greatly reduce your level of stress. Well, for some it might increase a bit until you get into the flow. Stick to it and you will reap rewards. 

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