If you own a small business, you need every help you can get to optimize your finances. Here are some useful tips for your small business:
If you work as an employee in your own business, give yourself a salary. This serves as an incentive that can motivate you to work harder. Plus, paying yourself can have tax benefits.
Don’t mix your business account with your personal one
Maintain a separate account for your business and personal expenses. Having one account for personal and business expenses would only confuse your accountant.
Pay your debts on time
Set up monthly reminders to avoid penalties on late payments. When running a small business, you need to be mindful of every expense you have to spend.
Again, only spend what is necessary for running your business and save anywhere you can. Buy secondhand furniture or use energy-efficient appliances to cut down utility bills.
Learn basic accounting
Even if you already have an accountant, it’s useful to know how the cash flow works.
Maximize your tax deductibles
The IRS states that “To be deductible, a business expense must be both ordinary and necessary.”
“Ordinary” is defined as an expense common in your trade or business, whereas “necessary” is an expense that is helpful and appropriate to your trade or business. Deductible expenses can be subtracted from a company’s income before being taxed. If all that information is too daunting, it’s helpful to hire a qualified and trustworthy accountant, who can keep track of all that for you. In the meantime, here are some expenses that are considered as tax-deductible, in case you’re not aware:
- Car and truck expenses – If you can prove the vehicles are used solely for your business, gas and repair expenses can be completely deductible. Otherwise, there are two ways to claim this deduction:
- The standard mileage rate – Use the IRS’ standard deduction rate to calculate your deduction.
- Actual car-related expenses – Keep track of all your car expenses for the year, including repairs, new tires, insurance, registration fees, etc. and multiply these business expenses by the percentage of miles driven for the business.
- Salary and wages – Employee salaries, including yours, are deductible.
- Contract labor – The expenses related to freelancers and independent contractors hired by your business are deductible.
- Rent – You can deduct the amount you pay for using a property to which you do not own or eventually receive equity or title.
- Utilities – Utility bills pertaining to your business, such as electricity and water, are considered necessary expenses.
- Business insurance – To be deductible, your insurance must provide coverage that is “ordinary and necessary.”
- Maintenance and repairs – These include toilet and roof repairs, a new paint job, or any service that is part of the maintenance and repair to your business property.
- Travel – These expenses are deductible but must follow IRS requirements to be approved.
- Advertising and marketing – Printing business cards, building your website, and advertising from social media to large billboards are necessary expenses to grow your brand.
- Home office – If you can prove a portion of your home is used regularly and exclusively for business, certain expenses can be deducted, including utilities, repairs, mortgage interest or rent, and insurance. However, you have to measure the square footage of space that you use as your home office and the total size of your home to make the calculation.
- Legal and accounting fees
- Meals – These can be deductible, with some exception of company picnics, etc.
- Rent – Rental fees on equipment or machinery you use in your business can be deductible.
- Employee benefit programs and retirement plans
- Office expenses – Besides office items like pens and post-its, you can include laptops, software programs, and any other office items purchased during the year in your deductibles.
Here are some non-deductible expenses to remember:
- Work clothing
- Daily expenses for work commute
- Country club dues
- Government fines and penalties
- Gifts to business associates, vendors, etc., which are capped at $25
- Entertainment, with some exceptions
Keep an eye on your spending
Small expenses add up, so it’s important to monitor your spending to avoid misusing funds.
Keep track of your receivables
Track payments and remind customers of pending payments by sending out invoices and late notices. Offering discounts to customers for early payments can be an encouragement.
Monitor your inventory
Monitoring your inventory saves you the embarrassment of running out of goods and losing a customer. It can also save you money if stocks are managed properly. Maintaining a record of inventory purchases and sales will keep you on the alert.
Have a cash reserve
For unexpected emergencies, it is useful to maintain a separate account for cash reserves, which should be preserved with a regular deposit of cash.
Keeping track of your cash flow and inventory and making sure you’re up-to-date with your receivables are all a good way to maintain your business finances in good order and focus on profitability. As long as you’re not in the firing line of an IRS audit because they suspect you’re abusing Section 831b compliance for insurance or other policies, getting a qualified accountant who simply understands your business and how to maximize your tax deductibles appropriately can boost your revenue in the long run.