If you are self-employed or own a small business, Congratulations! It is likely you go to work every day to do something you love. I mean what is more rewarding than that? But if your business and life’s passion is not accounting like mine, then it is also likely that you may not know the ins and outs of your business’s taxes and accounting.



First let me say this. Even though my business is a tax and bookkeeping firm I am well aware that every business does not need professional tax and/or bookkeeping services. I believe there are many instances where individuals and small businesses can save time and money by self-preparing their tax returns and doing their own bookkeeping. For this reason I feel that it is very important to educate entrepreneurs and individuals on what they should be doing to keep their finances in order. In this article I will focus on small business finances.

1. Keep records of income and expenses.

Here is a fun fact: you may not need fancy accounting software to keep your income and expenses in order. Microsoft Excel or even a spiral notebook may be sufficient. Only if your business is very small or does a small amount of transactions it is okay to use a manual system. I suggest at least using Excel. Either way, keeping up with what is coming in and going out of your business is the most important step in keeping your business finances in order. Missing deductible expenses on your tax returns can have a dramatic impact on your return. 

2. Know what expenses are deductible.

Since you are self-employed or a small business (LLC) you file your business income and expenses on a form called a Schedule C. This form reconciles your income and expenses to calculate your net profit. Your net profit from business is then entered on your main Form 1040. Now that you understand how the Schedule C works let’s take a look at what’s on it.

The form takes your gross profit (all income sources) and subtracts all deductible business expenses. Deductible business expenses are: Advertising, Car and truck expenses (3), Commissions and fees, Depletion, Depreciation and 179 Expense (4), Employee benefit programs, Insurance (other than health), Interest, Legal and professional services, Office expense, Pension and profit sharing plans, Rent or lease, Repairs and maintenance, Supplies (excluding cost of goods sold), Taxes and license, Travel and meals, Utilities, Wages, Other expenses, Home office expense (5). To see Schedule C click the link below.

https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

3. Track mileage or actual automobile expenses.

The standard mileage rate is the easiest way to calculate the deductible costs of operating an automobile for business purposes. The standard mileage rate for the use of a car (also vans, pickups or panel trucks) is 58 cents per mile driven. To use the Standard Method you simply keep track of business miles driven and total miles driven for the year. 

Even though the standard mileage rate is a much easier way to claim car and truck expenses taxpayers always have the option of calculating the actual costs of using their vehicle. When you use the Actual Method you will keep track of gas, repairs, depreciation, oil, fees, tires, insurance, washes, registration, and lease payments. Remember, you cannot take the full amount. You can only deduct the business use percentage. For example, if you use your vehicle 50% of the time for business, you will deduct one half of all of the expenses listed.

4. Depreciate or 179 Expense your assets.

Depreciation lets you deduct a portion of an asset's cost every year, until the asset no longer retains any value or has been sold, destroyed, or otherwise disposed of. The concept of depreciation is based on the notion that business assets eventually wear out, get used up, or become obsolete. It is required to depreciate assets with a useful life of over one year. The only exception is to claim the asset as a Section 179 expenses which allows you to take the total expense in one year.

Business assets must meet 3 conditions to be depreciable:

• The asset must be used to produce business income, rent, or royalty payments.
• The asset must wear out, decay, becomes obsolete, or lose value over time.
• The asset has a useful life that can be measured and exceeds 1 year.

5. Remember to take the Home Office Deduction.

Housing-related expenses such as mortgage interest, rent, utilities, repairs, and depreciation for the portion of your home or rental that you use to run your business are allowable expenses under the home office deduction.

You may be able to claim the home office deduction if your office is:

• Used regularly and exclusively for your business, and
• Is your principal place of business (both conditions must apply).

Keeping track of your business finances can be a bit overwhelming and that is why there are professionals such as myself to help you stay on track. However, with a little effort, guidance and the correct tools, basic recording keeping needed for tax time can be simple. Remember to seek help when you feel you need assistance. If you don’t need full service bookkeeping you may want to consider a quarterly or bi-annual checkup. Keep in mind your tax/accounting professional can also assist with estimating quarterly tax payments and self-employment tax. Of course there is one other reason to seek assistance from professional. Expenses that you pay to your accounting professional are deductible on your Schedule C.