After years of internal debate, you’ve finally decided to take the plunge and transform your passion project into a sustainable source of income. Taking this leap of faith means that you now have the freedom to launch your business vision as you see fit, hand-select your team of rockstar employees, and set your own work hours. (Unlimited PTO? Check.)
However, doing so also means assuming a high level of financial risk. During the leaner months, you’re the person who’s on the hook for payroll. Accordingly, meeting all of your legal obligations to your employees can translate into your business going without profit for a few months.
Playing your odds conservatively isn’t the hallmark of a failing operation—even booming businesses prepare for leaner times. Instead, leveraging your money wisely is a indicator of business acumen and a surefire blueprint for success.
Trust us when we say: Tax-savvy small business owners know how to implement the following money-saving hacks. So, roll up your sleeves, and let’s dive in.
1. Write off home office expenses IF you qualify.
If you’re operating your business venture out of your home, then you may qualify to deduct a bevy of associated expenses from your end-of-year taxes. But, certain conditions must apply:
- You must regularly and exclusively use the space to conduct business. This requirement means that your office can’t double as a spare room, entertainment space, library, doggy boarding area, or at-home gym. Remember: If the IRS ever audits your business, they’ll want to conduct an in-depth inspection of this space. So, when in doubt, it pays not to take any risks. Best to shove those winter skis in the attic instead.
- Your home office must serve as your principal place of business. If your home office doesn’t function as home base for your day-to-day business ops, then forget it. You’ll need to be able to prove that you conduct business here on the regular, whether that means coding websites or meeting in person with prospective clients. Did you meet the criteria to claim the home office deduction? If so, then you can deduct a percentage of expenses related to your mortgage interest payments, utilities, office repairs, and essential services like high-speed internet. To ensure that you adhere to the letter of the law, entrust the guidance of a certified public accountant who can help you calculate your eligible expenses.
2. Invest in your retirement pronto.
Retirement plans don’t just benefit your employees. They allow you to defer paying taxes on any earnings that you invest into traditional retirement plans. The funds therein are only taxed when an employee withdraws them in retirement. However, because you made that initial investment into an eligible account—such as a 401(k) or IRA—that grows as the years tick by, you’re actually earning money. So, invest away and watch your money grow!
For example, individuals under age 50 can invest up to $5,500 per year into their traditional or Roth IRAs. For individuals over age 50, that annual investment value increases to $6,500. However, thanks to the beauty of compounding interest, those investments mature over time, generating a robust source of retirement income.
3. Accurately calculate and deduct business vehicle expenses.
This deduction isn’t for the faint of heart. It requires meticulous attention to detail in your recordkeeping and receipts. Boatloads of them.
If you use a car in an official capacity to complete business activities, you can deduct certain expenses related to its operation. However, for mysterious reasons, vehicles that double as equipment (e.g., forklifts) or private transit (e.g., taxi cabs) don’t qualify. For less mysterious reasons, neither do luxury automobiles. So, save the Maserati for personal use.
Once your vehicle meets these qualifications, you must determine the percentage of the time that you devote its use to business activities. Here’s an important tip: The answer is never 100% of the time. For example, if you use the company car to make a Starbucks run—while essential in our opinion—it doesn’t count.
Also—and this is particularly important for small business owners to know—commuting miles from your home to your business aren’t deductible either. Unfortunately, Congress assumes this to be a baseline cost for any worker vs. a deductible business expense.
From there, decide if you’ll be deducting the standard mileage rate or itemizing the costs to reflect hidden fees (such as monthly parking passes, tolls, etc.). For 2021, the IRS has set the standard mileage rate at 56 cents per US dollar.
4. Receipts, receipts, receipts.
On that note, let’s discuss the importance of saving your receipts and divulge a little-known hack.
According to the IRS, you’re supposed to save any business receipts for up to five years. We hear you. That’s crazy talk. But, annoyingly, creating a paper trail is essential in the event of an IRS audit. The agent assigned to your case will expect you to furnish evidence of home office expenses, mileage, you name it. So why not say goodbye to those little crumpled-up bits of paper and let an app organize the data for you? There are numerous apps on the market with built-in scanning functionality to digitize those receipts.
Conveniently, this discussion provides the perfect segue into our next topic: Quickbooks.
5. Quickbooks to the rescue.
Quickbooks is one such app that enables you to upload and store your receipts with minimum hassle. But, it’s also an ideal tool for running many of the day-to-day financial operations of a small to mid-sized business.
Quickbooks integrates seamlessly with a range of programs from PayPal and Shopify to Amazon Business and Microsoft Excel. Like Salesforce, Quickbooks’ customizability is one of its crucial features, whether it’s displaying data via reporting or generating invoices and processing payroll. But, unlike Salesforce, Quickbooks is easy and intuitive to use.
Likewise, when tax time rolls around, you’ll be grateful that you have it. Simply give your accountant access to your Quickbooks, and watch the magic happen.
If you’re not a technology guru and setting up Quickbooks seems daunting, you need not stress. At Steven Lissner & Company, our accountants provide Quickbooks setup, tutorials, and customized solutions for your business. Enlist a best-in-class accounting whiz to solve your bookkeeping issues and free up more time for the things you love—like interacting with customers.
6. Deduct fees for new (and used) business equipment.
We all know that you can deduct the business expenses incurred for purchasing new equipment, whether it be an updated computer, an industrial-grade freezer, or a company van.
But, did you know that you can also deduct the costs associated with used equipment that you purchased during the tax year? If you weren’t in the know, don’t beat yourself up too badly over it. The IRS amended Section 179 to expand the equipment eligibility requirements within the last five years.
Exactly how much in expenses can you deduct? You can write off the eye-popping full amount of $1,0505,000 in equipment costs. If your enterprise falls into the small business category, this deduction can feel like a much-needed windfall.
7. Don’t be afraid to claim your losses.
By losses, we don’t mean the money you lose during a particularly poor-performing quarter. Instead, we’re talking about certain debts that you’re unlikely ever to collect. Let’s face it: Sometimes customers don’t pay up.
When that occurs, you don’t have to chalk it up simply as a financial loss. Instead, the government allows you to deduct those debts from your yearly earnings. This provision can take some of the sting out of a business deal gone bad.
8. Advertise away!
Marketing costs to enhance your business’s profitability margins are fully deductible—so advertise away! Hire a UX designer to give your website a user-friendly interface. Employ an SEO expert to fine-tune your content strategy, enriching your site with the keyword-rich language that search engines love. Divert some funds to social media marketing, video production, and expanding your online presence.
In capable hands, advertising costs are a win-win. They bring you business revenue and they save you money on end-of-year taxes.
The Secret Sauce of Tax Savings
Just as advertising is better off left in the hands of professionals, so too is filing your taxes. Almost any cook can make brisket, but only a handful of cooks know the secret sauce recipe that makes customers queue up for miles around.
A skilled certified public accountant is like a Michelin star chef. They possess all the ingredients needed to whip up a winning financial strategy. Whether you’re a small business owner or a late-career CFO, hiring a tax accountant to maximize your returns is always a good idea.
With an industry-leading tax expert in your corner, you’ll be able to identify unique solutions for your business and devise a blueprint for your financial future. You’ll receive human support for all of your tax questions, instead of relying on automated algorithms and faq sections. And, you’ll be prepared when chaos descends in the form of an IRS audit. Scratch that. What would otherwise seem like chaos will now proceed like orderly, predictable clockwork.