It’s the most wonderful time of the year
Okay, I’m a few months late with those lyrics and I’m pretty sure no business owner has said (let alone sung) that about tax season unless they DO taxes. But to those of us involved in the preparation for (or of) taxes, it’s puzzle time! I recently told a client those exact words. What looks like a jumbled mess to you is an intricate puzzle to me and I’m dying to help you put the pieces together!
Start with the Corners
We aren’t talking about 3d puzzles or anything with a weird circular layout here. Your basic puzzle building starts by finding the corners right? It’s the first step, the fewest pieces, the easiest to gather. In our analogy for taxes, this is most likely your revenue. Most small business owners can easily tell you their revenue number. You track customer payments in your CRM, your bank account easily displays your deposits, and/or your payment vendor keeps clear records of the funds received and disbursed to you. Because it’s the easiest to find, it’s the easiest to report. But it’s only the beginning. Do NOT stop at this step. If you are paying your small business taxes based solely on your revenue, you’re paying way too much!
Find the Straight Edges
Any good puzzle builder knows the next step is finding the straight edges. Whether you have an accountant, accounting system, or a shoe box; your straight edges are your records. It’s time to build the border! If you’re in the shoebox category don’t worry…you’re in good company. That puzzle might have gotten a little bigger but you can still find all the pieces. Comb through those bank statements, emails, CRMs, and shoe boxes. Find every business expense. Make sure recurring expenses show up in your records at the right frequency (weekly, monthly, quarterly, etc.) and don’t forget those cash expenses! Grabbing cash for parking, tips, or even small petty cash expenses doesn’t make them any less important. You can only deduct a business expense with reliable records. I’m not talking about just credit card statements or bank statements. The IRS requires itemized receipts and records of business purpose, attendees, etc. Any time you’re ready to pass the torch on all that paperwork I’m here for you!
Group by Color
Now we’ve sorted through the pieces, it’s time get to the really fun part (for us accounting geeks at least). If you don’t already have your business expenses categorized in an accounting system or with an accountant, it’s time to organize. Just like puzzle building, we have to group our pieces. Some of the most common groupings (otherwise known as accounts) are:
- Advertising Expenses
- Business Vehicle(s)
- Employee Benefits
- Meals & Entertainment Expenses
- Office Expenses
- Office Supplies
- Professional Services
- Rent, Utilities & Phone
- Travel Expenses
Even if you have an accounting system, it’s important to review these groupings to make sure they’re accurate. Tax treatment of certain expenses is not the same as accounting treatment.
Plug in the Pieces
Like I said, tax treatment and accounting treatment are not always the same. Not every puzzle piece fits every gap. This is where a good tax accountant comes in handy but you can tough it out on turbo tax if you prefer. The key to this stage of the puzzle is remembering that
Every tax deduction is an expense but not every expense is a tax deduction
To help you out, I’ve listed a few of the most common deductions and how they might trick you into thinking they fit somewhere they don’t. As with all tax advice, please contact your tax advisor before claiming anything directly on your tax return. This information is general in nature and may or may not apply to your situation.
I put this one first because the pandemic has changed working situations for so many small businesses. Whether you’ve been working from home all along or relocated during the year, you can deduct $5 per square foot (up to 300 square feet) for your home office. Before you ask, no, your kitchen table does not count. The office space has to be dedicated solely to your business. If it is, you get your choice between that simple $5 per square foot or a slightly more complicated allocation of mortgage, insurance, utilities, real estate taxes, etc. Either way, don’t forget this deduction even though it may or may not have been physically paid for through business bank accounts.
Yes, you can deduct that coffee with your client to discuss the next contract or project. BUT you can’t deduct the whole thing. Generally speaking, you can only deduct 50% of meal expenses that qualify. Part of qualifying is keeping those records we talked about. Make sure you keep the receipt and make a note of who was there and what was discussed. A good bookkeeper (hint hint) can throw these details into your accounting system so you don’t have to hunt them down in your shoe box later.
If the 2020 pandemic pushed you into self-employment faster than you planned, you’re not alone. But you should also know that you will likely be able to deduct a decent amount of the expenses paid to start your business (without amortization). This includes advertising costs, training, legal fees, accounting expenses, and more. There are limits and limitations of course. Deductions cap out at $5,000 and phase out if total startup expenses or organizational costs hit $50,000. Your tax situation, tax brackets, and future net income can significantly impact the potential for this deduction to be beneficial. You should always consult with a tax professional on your specific situation.
It may not be the most wonderful time of the year…
I’m not sure doing your taxes (or getting them done) will ever feel wonderful but I hope this helped make the preparation for them a little less overwhelming. If not, contact me so I can put the pieces together for you. I love a good puzzle!