This is a great time to be a small business owner, with over half of all small business owners anticipating growth in 2019. As a small business owner, you can feel good that you’re stimulating the economy, providing options to consumers, and doing work that you’re passionate about.
Unfortunately, however, running your own company also comes with plenty of expenses. Small mistakes can add up over time, costing you a significant amount of money over the course of a year. Try the following tips and tricks to minimize your expenses AND save money that you can put back into your business.
What small business deductions can I take?
Small business owners are entitled to a wide range of tax deductions, but many people miss out on deductions that they can claim every year. While tracking expenses may seem like a lot of effort, it’s work that pays off. Even better, you can streamline this process with apps, software, or accounting professionals.
Keep in mind that tax laws change frequently, and failing to comply with federal law can have serious consequences, so make sure that you follow the letter of the law when taking deductions.
As you prepare for tax season, consider using these deductions for your small business:
Auto expense deduction
If you use your vehicle to conduct business, you may be able to write off expenses in two ways:
- If you have a car payment on a business vehicle, you may be able to write off part of a lease.
- If you opt to purchase a car in your company’s name, you can write off the interest you pay each month.
Compare both types of deductions to figure out which one will save you the most money each year. Note that a lease deduction is only possible for those who write off actual vehicle expenses. If you use a standard mileage rate deduction, this is not an option. Also, a standard loan payment is not a deductible expense.
Business meal deduction
Networking happens at the cafe, the dinner table, and the golf course, so some of these expenses can be written off on your taxes:
- You may write off 50% of your meal expenses, whether you’re dining with a customer or you’re out of town on business. Keep in mind that you must keep receipts and track costs.
- You may also deduct some entertainment expenses if you entertain clients or customers. Just don’t go overboard. Expenses must be considered “ordinary and necessary” to be deductible.
Section 179 deduction
If you purchase property for your business, you may be able to write them off in the year you purchase them. Most small businesses can claim up to $1,000,000 of qualifying equipment on their 2019 taxes.
You may also write off the amount that new equipment depreciates within the first year. Before going all out on new equipment purchases for your business, however, make sure that the items you need are covered under the 179 tax code list of qualifying equipment.
Home office deduction
While standard employees can no longer write off their home office expenses, the same isn’t true for self-employed professionals. If you’re self-employed and you file a Schedule C, you can write off the expenses associated with the use of your home office. This must be the primary place you do business, so calculate your expenses carefully and cautiously.
Additionally, your home office must be used exclusively for business (aka: so you can’t claim a home office-slash-playroom-slash-exercise room).
How do I avoid tax penalties, fees, and fines?
The IRS means business, which means you should triple-check your taxes with a fine-tooth comb. Small errors on tax documents can lead to hefty fines, cutting into your profit margins and leaving you with a stack of scary-looking letters from the IRS. Reduce your risk of penalties and fees with the following ideas.
Use tax software
No matter which industry you’re in, tax software will help you save a ton of time and prevent headaches once tax season rolls around. While few people still rely on the paper-and-pencil method, some still think that this is the safest way to do taxes and avoid audits.
Tax software can do a lot that most people can’t, however — unless, of course, you’re a tax professional. Dependable tax software can double check your numbers and look for numbers outside the norm, helping you avoid missed or extra zeroes.
Software also looks for common deductions, making it easier for you to take advantage of deductions like those listed above. Additionally, tax software handles the filing process for you, so you don’t have to trust your personal documents to the postal service during one of its busiest seasons.
Check out our roundup of the Best Tax Accounting Software
Hire a tax professional
There are several advantages that come with hiring a tax professional. Just keep in mind that all accountants aren’t created equal. Look for one with specialized experience in your industry, since this person will know the common deductions in your field and help you minimize the amount you have to pay.
Additionally, you may find that tax software is still too hands-on for you if you have a packed schedule. With a tax professional, you simply hand over the relevant receipts and leave them to it. While this may be more expensive than doing your taxes on your own or using software, you may be able to make up the difference with maximized deductions.
Opt to e-file
Whether you opt to go with tax software or a tax professional, choose e-filing over paper filing. This way, you’ll feel confident that your tax documents reach the IRS on time, which prevents costly late fees.
Taxes aren’t an area to cut corners. After your tax software or tax professional completes your tax documents, carefully go over each document that will be submitted to the IRS. Your signature indicates your approval and acceptance of everything on these forms, so take the extra time needed to verify everything.
Use payroll software
If you have employees on your payroll, make sure you’re paying the proper taxes on their income. This is one of the most common sources of penalties for business owners. Not only can this help you avoid fees and fines, but it can also save you a considerable amount of time each pay period.
Check out our roundup of the Best Payroll Services for Small Business
How do I keep my business finances organized?
It starts with a personal transaction on your business credit card at the coffee shop, and before you know it, your business and personal finances are completely entangled. New business owners are particularly prone to this error, since they may underestimate the complexity of their finances or want to avoid the expenses of separate business accounts. Good financial health starts with a strong organizational system, however.
These tricks can help you keep your business finances in tip-top shape.
Always keep business and personal finances separate
This may seem counterintuitive, since the work involved in managing two accounts may seem like more than the work that comes with a single account. Separate accounts only require a little bit of regular maintenance, however.
As long as you always use the right card or account for each transaction, there’s very little calculating and record keeping you need to do. Once you have separate accounts set up, check your transaction logs each month to ensure that you haven’t accidentally mixed up business and personal transactions.
Have a solid filing system
A reliable filing system is a key to any small business owner’s success. If you’re audited or you have to solve a mix-up in your accounts, proper records will be your saving grace. If possible, maintain physical and digital records. You never know when you’ll lose a file or a piece of paper.
With digital and physical copies, you’ll never have to lose sleep over a missing invoice or pay stub. Keep separate files for different time periods — many business owners use monthly records — and separate types of files, such as pay stubs, tax records, and client invoices. This can help you find the document you need in a matter of seconds.
Perform regular financial maintenance
It can be a little nerve-wracking to look at your business accounts, particularly if you’re in the early stages of business ownership and your expenses always seem to outweigh your incoming funds. Regularly checking your accounts is a great way to catch unpaid invoices, double-charged transactions, and uncashed checks.
You may choose to verify your accounts once every two weeks or once every month. Just setting aside an hour or so allows you to run down your transaction log, send out notices of unpaid invoices, and follow up on fraudulent transactions.
If you haven’t noticed, documentation is a key part of saving money (beside other cost-saving measures like saving on energy costs). Without tracking your spending, you may underestimate how much you spend on business items and lose out on valuable deductions. On the other hand, you could overestimate your business costs and end up with an audit for your suspicious deductions.
Either way, you’ll really wish that you had kept track of your expenses and held onto relevant receipts. Double-checking your expenses every so often can also help you find ways to save money on business expenses. You may find that you’re paying for two similar services or a service that you haven’t used in months.
How do I save money on small business expenses?
It’s clear that making small changes to your financial routines can help you get more bang for your buck. Working the following recommendations into your financial habits can put you in a great position to take your business to the next level and reduce your expenses.
Again, utilize accounting software
Automation is an easy way to avoid financial errors, but beyond that, it also makes the most of your time. As a business owner, you know that time is your most valuable asset. Accounting software can make a lot of the tips on this page much easier. Software like QuickBooks or Quicken can automatically sort transactions into personal and business categories, help you create professional invoices, and give you an easy way to follow up on client invoices. These programs can also create documents that simplify the tax filing process.
Check out our roundup of the Best Online Invoicing Software
Hire independent contractors
In some cases, you can save money on your operating expenses by using independent contractors instead of employees. With employees, you have to pay taxes, FICA, and other expenses. You may also have to provide health insurance and other benefits.
Independent contractors cover their own taxes and don’t qualify for health insurance or other employment benefits. It’s important to note, however, that independent contractors are only a viable option in some industries and roles. Make sure you consult with an employment lawyer or triple-check independent contractor laws to ensure that you’re operating within the limits of the law. The fees associated with requiring independent contractors to take on an employee’s duties can be severe.
Don’t forget about retirement planning
Paying into a retirement plan is something that pays off now, as well as down the road. If you have a sole proprietorship, saving for retirement can lower your tax burden and give you the peace of mind of being provided for in your older years.
If you own a small business with employees, maintaining a retirement fund has multiple benefits. Contributing to employees’ retirement funds can help you draw in more experienced employees and put your business in a position to grow. It can also minimize your business taxes.
Choose the right business structure
There are several types of business structures, each of which has its own pros and cons. The most common options include sole proprietorship, partnership, corporation, and S corporation. In some states, you can also create a Limited Liability Company(LLC). The best option for you will depend on the size of your business and how much money you bring in, amongst several other factors. Research all options available in your state prior to making a final decision.
If your employees travel for work, entertain clients, or go out to eat while conducting business, consider an accountable plan. This allows you to deduct these types of expenses from their income without reporting them as employee income. This can reduce your employment taxes, as well as taxable income. As an added bonus, offering this benefit to employees is another way to recruit top-notch candidates.
Don’t be afraid to negotiate
This single tip can save you a substantial amount of money if you execute it properly. New business owners are often afraid to play hardball with suppliers or service providers. In fact, some won’t even ask for a discount!
While many providers won’t be open to negotiation or offer discounts, you never know what’s available if you don’t ask. Don’t underestimate the value you bring to the table as a customer and don’t be afraid to try out different suppliers if your current ones refuse to offer you discounts or promotional offers. You may discover a more competitive choice that better suits the needs of your business. You may also find additional discount opportunities if you join a local trade association.
Buying in bulk is tempting, especially when there are significant discounts available. Before you jump at the chance to buy materials in bulk, think about whether or not it’s really a good call for your business. Inventory that sits in your stockroom or factory goes stale quickly, and buying in bulk can actually cost you money if you have to dispose of materials.
When making purchasing decisions, carefully consider purchasing habits in previous months and think about how much inventory you really need to meet customers’ needs. You can increase your ordering as your business grows, but don’t throw away money by buying more than you need in the early stages of your business.
As a business owner, the work you do is important. Small businesses strengthen the local and national economy, offer competitive employment options to workers, and bring valuable services to the global community. While some expenses can’t be avoided — after all, sometimes you have to spend money to make money — there are many ways you can trim the fat from your budget and help you keep as much of your money as possible.