Small Business Owners: Tips for De-stressing Tax Season
Tax day is fast approaching. Being a business-owner is wonderful in so many ways but it does come with its own set of unique challenges; taxes are one of them. Gone are the days of simple withholdings and 1040ez filing. Now we tackle itemized deductions, depreciation, business expenses, and mileage tracking. But do not let this deter you from realizing your dream of owning your own business! With a few simple tools and some slight modification to your regular routine, April 15th will no longer be a dreaded date!
Staying organized is the key to reducing stress come tax season. Scrambling for receipts and documents at the last minute only makes it worse. Here are a few ideas that might help to keep you organized, maximize your deductions, reduce the possibility of audit and breathe a little easier during tax time:
Separate business from pleasure
The easiest way to keep personal expenses separate from business expenses is to maintain separate financial accounts (both bank accounts and credit cards). If you are not quite at the point of opening a second bank account, then consider, at a minimum, carrying two credit cards: one for business and one for personal. This can be an additional advantage by personalizing your card with an image or logo which represents your business. Many institutions allow you to upload an image to add your credit or debit card; consider using this feature to market your business.
For those of you who are storing receipts in a shoe box, get ready to de-clutter! Technology is advancing faster than most of us can keep up. Thankfully, the IRS has jumped on the bandwagon and is accepting digital documentation for itemized deductions and expenses. There are many smartphone applications available which allow you to capture an image of your receipt and add notations, categories, client assignments, etc. Two of the most versatile, user-friendly and comprehensive are Expensify* and Expen$er**. Both of these applications allow you to capture an image of a receipts, add comments, and export information into useful reports. For those who entertain clients and have related expenses, these apps allow for comments about what was discussed during the meeting. This is hugely important if you are writing off these expenses.
Maximize the deduction for your home-office
If you have a home office, you are eligible for significant deductions. The IRS allows for the deduction of certain home expenses based on the percentage of space that your office occupies within your home. The recommendation is to measure the exact dimensions your office in order to calculate the square footage. Be sure to document this with a sketch or picture notated with the dimensions. Once you have calculated the space, you can apply this percentage to your rent/mortgage payment and certain utilities.
Simplify your phone usage
This may seem like such an obvious item, but I have been asked by several people how I itemize my phone as a business expense, given that it is a personal use item as well. The easiest and best way I have found is to choose three months from the year and go through the corresponding phone bills, highlighting personal vs. business phone calls. Some cellular phone providers offer an exportable phone bill (to an excel spreadsheet) which will allow you to manipulate the information in order to calculate phone usage. Otherwise, get out the ol' calculator and start adding. You can use these numbers to project an average usage for the year. Should an audit be requested, keep these bills on hand with your notations to support your deduction.
If you use your vehicle for business purpose, you are allowed certain deductions based on its use. The IRS grants two options: deduct actual expenses or deduct business use mileage. In my experience, the second options yields the greater deduction and, believe it or not, is easier to track. Depending on how detailed you are, you can keep a log in your vehicle and track your odometer at the beginning and end of every trip related to your business. Another option is to use a mileage tracking application on your smartphone (there are a million out there, all with the same features and functionality. Instead of listing them all, I recommend trying a few until you find one that suits you.). This method also requires you to log your odometer readings but also allows saving frequent addresses so you can add regular trips easily. For me, I use an average approach: I keep a digital calendar where I add meetings and business related outings. The key is to capture your odometer reading before you start this project. At the end of the month, I go back and calculate the round trip distance for each entry and compare that figure to the total usage. Again, if you can do this for three months (either consecutive or not), it gives you a fairly accurate percentage of business use/personal use. In addition to being able to write of vehicle expenses, mileage is another great deductible item!
Organize appointments and related expenses for later reference
As I mentioned above, keeping a separate calendar for ALL your business related appointments/trips/errands/etc., will make your life so much easier for later reference and especially for tax preparation. If there is ever any question about where you went or who you saw, keeping a record of each activity as a calendar entry will solve so many problems. In my practice, I even use these entries to capture mileage driven, notes about the event, and a note about any expenses which might have been incurred from the event (i.e. discussion topics during a business meal). Keeping everything in one place definitely reduces the chaos and confusion that can arise during tax season.
Preparing taxes is never a fun project. Creating a plan for yourself for staying organized and tracking your business expenses will make this process so much easier in the end. Stay ahead of the game by carefully researching your available deductions. There are so many resources available for self-employed and small business owners. The Small Business Administration (sba.gov) is an excellent source for finding more information about tax filing; even recommendations for local tax professionals who can help.
For more solutions on staying organized and being efficient, please feel free to contact me at firstname.lastname@example.org.
Columnist Jessica Baggot lives near San Francisco, CA and works as an independent Organizational Development Consultant. She specializes in efficiency and productivity consulting, helping small businesses refocus their efforts in order to increase revenue. Jessica attended the University of California at Davis where she studied Psychology and International Relations.