Entrepreneurship may seem scary at first sight, while budgeting the expenses is much simpler than it may appear to be. This is an organized hoard where one collects receipts for the items he or she buys in order to run his or her company. It is like some kind of treasure hunt where the prize is to pay less tax. IRS loves papers, and here we give papers.
The most important rule of all is the separation rule. For one’s business, it is essential to have a separate bank account and a separate credit card. Do not spend a few bucks buying a pack of gum with the same business credit card, which one used for grocery shopping. Commingling of funds makes a headache which no accountant will enjoy.
One should be aware of what expenses can be deducted. Purchasing a domain name on GoDaddy, as well as paying for Adobe Creative Cloud is all deductible. Buying office supplies from Staples, as well as purchasing an ergonomic chair on Amazon is deductible. In case one travels to another city to see his or her client, miles which were driven to him or her can be deducted using MileIQ. Everything one buys which helps to earn money – can be deducted.
Everything has to be proved according to IRS guidelines. One’s bank statement is not sufficient evidence of purchase of an expensive item. There has to be a receipt, which shows what one has bought in details. There are special applications, such as Dext or QuickBooks Online which enable one to scan receipts right away. One should better do it immediately, since papers fade, and memories are not always accurate.
Such expenses have to be tracked on a regular basis. Doing it once a year during the tax season is the guaranteed way to make one’s head explode. One should schedule a meeting with himself or herself in order to update his or her bookkeeping weekly – say, every Friday. Categorizing will help to evaluate whether one overpaid for marketing campaign or not. Excel will work, but there is also special software for accounting.
There are some expenses which are a bit difficult to understand. The percentage of business use of the cell phone plan is deductible, but in case one works from home, the home office deduction requires precise calculations. One should not use any estimates here since it will invite an audit by the IRS. One should measure his or her space and calculate percentages accurately.
In case one’s business starts earning profit, hiring an accountant will be the worthiest investment. A CPA will know the tax codes which one does not know and therefore, will save one money on tax. His or her fee will be paid by itself and even more. Until then, one should keep his or her digital shoebox neat and organize his or her receipts properly. Accounting means money.