With the passage of the Tax Cuts and Jobs Act in 2018, significant reforms to corporate taxes occurred, many of which affect small business owners for the better. In fact, there’s never been a better time to get your side hustle going.
Why? Because the marginal tax system for corporations is gone. In its place, corporations now see a flat tax rate of 21 percent on all profits. No matter how much their business brings in.
What’s more, corporate taxes are now territorial rather than worldwide. What does this mean for corporate America? It means that profits earned outside the US will no longer be taxed.
Of course, all of these changes mean you should rely on a seasoned tax professional to help you navigate these new IRS regulations. You also need to make small business expense tracking a priority.
Read on for handy tips to make business tracking a cinch.
Organize Your Personal and Business Finances
When you open your own small business, it’s initially very difficult to separate your personal and business finances. After all, you may be investing every drop into your business and not have many personal assets left over.
This proves especially true if you’re a sole proprietor and own a micro business with five or fewer employees.
But no matter the size of your company, once you gain a foothold and start bringing in profits, you need to open a business bank account that’s separate from your personal account.
This represents the first step in tracking your business expenses and income. It also helps you keep your financial records better organized and helps you prepare for tax season with greater ease.
Besides a checking account, you should also consider opening a business credit card. That way, you can guarantee that your personal and business finances don’t stay permanently entangled.
Choose an Accounting System and Stick with It
When you started a small business, what was your driving passion? If small business accounting isn’t the first thing to come to mind, you’re not alone.
Accounting can prove a serious challenge for small business owners. It can also be time-consuming, stressful, and fraught with stress.
Having an accounting system in place will help you overcome this stress and get back some of your time. Options for tracking your income and expenses include:
- Hiring a CPA or bookkeeper
- Using a spreadsheet
- Relying on accounting software
Hiring a CPA or bookkeeper allows you to get your finances squared away from the start. It also provides peace of mind when it comes to the IRS and ensuring your deductions make sense and are appropriate.
A CPA or bookkeeper will save you both money and time, so consider this your best option. Especially if you hate bookkeeping or have very little experience with it.
You can also keep a detailed spreadsheet that provides you with snapshots of your income and expenses. But these can lead to errors, so only use this method if you feel comfortable with it and have solid bookkeeping experience.
Finally, there’s a wide variety of cloud-based software out there that can help you gain control of your expenses. But they, too, come with room for error, especially if you go with low-end software with limited functionality.
Decide on an Accounting Method
Did you know that two main methods for doing business accounting exist? Which one are you currently using?
The methods are:
- Accrual-based accountingÂ
- Cash-based accountingÂ
An accrual-based accounting system proves more complex than a cash-based method. It requires that you record income and expenses when you accrue them rather than when you receive or make a payment.
As for the cash-based method, it proves the simplest for small business owners. It’s as straightforward as recording income when it comes in and expenses when they go out.
The right CPA or bookkeeper can guide you through which method to use based on your small business’s needs.
Track Those Expenses
To monitor the health and growth of your business, you need to keep an up-to-date business expense spreadsheet. So, set up a consistent tracking system that lets you see your costs and deductions. That way, come tax season, you’ll be ready.
This also means keeping track of all receipts for business-related purchases that you or your employees make. Again, having one dedicated business credit card comes in very handy in this respect.
Of course, all of this requires a basic knowledge of what’s tax-deductible. Commonly deducted costs include transportation, phones, office expenses, mileage, and more.
Keep Tabs on Your income
Besides consistently tracking your business expenses, you should also keep close tabs on your total income. This should be done monthly to avoid cash flow problems and other financial issues.
When you keep track of your expenses, income, deductions, and receipts, you ensure your company doesn’t fall behind. You also make tax season a whole lot easier.
With all of these resources in front of you, you can also regularly review how your business is performing. This means you’ll catch both negative and positive trends more quickly, allowing you to make adjustments as needed.
For example, if your records indicate a loss of income, then it’s time to cut back on business-related expenses. These might include conferences and business meetings that require travel.
Once you get back to the earnings level that you expect, then you can resume these activities.
Small Business Expense Tracking
Small business expense tracking proves crucial to the health of your business. So, you need to regularly monitor these numbers.
When it comes to how to track business expenses, the tips above will you put you on the road to a better understanding of your business’s strengths and where improvements could be made.
Ready for more great tips to make the next tax season go more smoothly? Find out how to avoid audits and get more back from the IRS with this small business deductions checklist.
