Tax season is annoying, especially when the IRS enjoys playing little tricks on small and home based businesses. Large corporations can employ people that keep up with the multiple changes that occur each year and have prominent CPA firms to act as watch dogs.
Not true for small business.
We have to rely on keeping up on what is a legitimate tax deduction, and although some employ accountants, I know a lot of businesses submit their own tax report because it’s cheaper.
A prominent tax advisor stated that overlooked deductions every year allow the IRS to pocket $250,000 that should be left with us.
Here are a few thoughts: generally, you can utilize a Schedule C form if “your intent is to make a profit” and you “work consistently for a minimum of ten hours a week.”
Other things to take note of are keeping an appointment book and a phone log, placing business emails in a folder on your computer, maintaining a client database, having business cards and, of course, keeping all receipts. Information on receipts should include: who, what, when, where, and why.
My personal tax adviser never allows me to claim entertainment…dinners mostly. We run it under advertising. Now, if you and your prospect go Dutch treat, you can deduct 50% of your half of the tab. I also use business gifts, particularly when clients introduce me to a potential prospect.
Car allowances are constantly being fiddled with by the IRS. I believe you can write off the entire lease if you use your car for business well over 50% of the time. Just remember when you are going to the grocery store, be sure to stop off and leave a sample or promotional piece while you are out. For those taking mileage, a simple travel log kept in the car is quite sufficient. If you don’t think the price of gasoline is going to skyrocket again, you may consider that Big Vehicle deduction under IRS 179. Just be sure on the door it reads GVWR6001 – I think that means it weighs 6000 pounds.
Travel expense is always fun if you are going someplace you enjoy. Go to www.gsa.gov and compare the per diem costs of the most popular convention destinations. Here is a little trick that the IRS can’t touch. The per diem cost in San Francisco is $48/day. But if you stayed at Aunt Betty’s house and she drove you to the convention, you could still write off the allowable deduction. Neat, eh?
Hire your children and make them work for that allowance and you can write it off. They must contribute to your business, of course.
Presentation expenses are allowed. That projector and screen that is used at trade shows and other venues can also be used to enjoy family parties.
The bottom line is this. If the IRS comes calling you must be prepared with all the records they want to see. A big smack down is writing off a portion of your home as a home office, including a portion of the utilities, taxes, assessments, etc. The IRS has made it clear that the office must have a separate entrance and the room is actually an office…not the dining room table. I stay away from that one altogether.
Hope this helps…we have a little time left. If you have thoughts or comments on this topic, I’d love to hear from you.
Best,
Ruth Ann Hall
Most small businesses start with loans or investors. True, a small percentage of business owners use their own money for start-up costs, but that is not the norm. Most of us are not independently wealthy. We start with a great idea, a few dedicated individuals (usually ourselves and a few friends or family members), and a loan to get us going. This means that from minute one, the business is in debt.
It is standard to borrow enough money to operate the business for the first year with little to no profit, even though we hope we’ll have profit from day one. However, getting enough money for the whole year is impossible for most of us. This means we have to find other ways to make ends meet, which usually translates to underpaying employees and cutting corners on expenses.
My mom bought her business (a bakery) for nothing from the previous owners, who wanted out in the early 1990s and didn’t think the business was worth anything. At the time, we were serving only wholesale clients (restaurants), and our profit margin was ridiculously small. The building was leased, but we did acquire some basic cooking equipment, including two convection ovens, a walk-in refrigerator, and a few large mixers. When we decided to expand the bakery into a bakery/café with a dining area, we needed a lot of new equipment.
We borrowed as much money as we could using my mom’s house as collateral. Most banks will only loan you a portion of the equity you hold. In our case, we were only able to get $23,000 to start the business. That may seem like a tiny sum to fund a new business, and it is. We were forced to make tough decisions about how to spend the money. The portion of the building that would become the café needed lots of work. We also needed an espresso machine (commercial ones start at about $6,000), tables and chairs, counters, display furniture, and cash to pay our staff until we could get going.
We spent over $12,000 on rent during our first year in business, which was more than half of our start-up money. Though we inherited some equipment from the previous owner of the bakery, we were surprised at how quickly the money went, even with my family doing most of the work ourselves.
When we first opened, we had nothing in the bank. We were depending on our new income to help us pay off the loan and our new, larger bills. This meant that we were always a few steps behind our expenses. If we had a slow week, bill couldn’t be paid.
Small Businesses MUST Juggle Cash Flow & Expenses
A big part of running a small business is juggling cash flow and expenses. It is necessary to rob Peter to pay Paul, on a daily basis. In the case of my family business, we struggled through the first two years and paid off about a third of our start-up loan before we decided to borrow more money. Sometimes, loan money is used for start-up or expansion, but in small businesses, loans can also be useful just for improving your financial situation, paying off bills, and bridging the gap during slow times.
In the seven years since we opened, we’ve borrowed money three more times. But, we’ve managed to pay off the original bank loan and we’ve made capital improvements along the way. Every business has moments when cash flow is nonexistent and it seems to be circling the drain. Even soft drink giant Pepsi Cola declared bankruptcy in the 1920s and then recovered. Slow times and financial turmoil don’t have to mean the end, even for small businesses. Before you think of giving up, it’s important to know your options. Whether you need a new budget, an adjusted business strategy, a line of credit, or just more money, step one is believing that success is possible. Don’t be too quick to decide that it’s not worth it.
Note: If you’re interested, the bakery’s name is La Dolce Via, located in St. Louis, MO. View our website.