There are sexy aspects of business – things like branding, marketing, advertising, design, and product innovation – and then there are technical components – like logistics, finance, and accounting. But when it comes down to it, it’s typically these latter elements that make or break small business success.
15 Money-Saving Accounting Tips
There are plenty of ways for small businesses to enhance their financial standing and grow, but strategic accounting is one of the biggest (and most frequently missed) opportunities.
To help ensure your small business stays on track, we’re providing a list of 15 tips you can use to potentially save thousands of dollars. Take a look:
1. Take a Basic Bookkeeping Class
Common sense and proper organizational skills will get you a long way with accounting. However, there are some more technical aspects of the process that are best learned formally. Even if you plan to outsource your accounting or use an automated solution, it’s helpful to establish a basic understanding of why and how certain things are done. An introductory bookkeeping class – whether online or in-person – is highly recommended.
2. Develop a Proactive Tax Strategy
It’s easy to get caught up in isolated tax issues and forget to keep the big picture in mind. For example, you may feel like the best option is to start your business in another state to save on taxes. However, you also have to consider the ramifications of moving the business to that state – including legal, administrative, and other indirect costs. Taxes shouldn’t be approached with a mentality of shortcuts and loopholes. Rather, you need a proactive tax strategy that looks at the present and future, and makes calculated decisions based on the best possible outcomes across the board. You can hire an accountant or tax professional to help in this regard.
3. Form an LLC
Many small business owners think their ventures are smaller than they really are. As a result, they continue to operate as sole proprietors when they could actually benefit from incorporating.
In a lot of situations, it makes sense for sole proprietors to launch LLCs. This eliminates some of the self-employment tax and provides other perks that save money and protect profits.
4. Use a Cloud Bookkeeping Service
If you’re still using a paper accounting system or on-premise solution (such as downloaded software), you need to switch to the cloud. Cloud accounting software is easier to use, more cost-effective, and promotes better security.
As Xero explains, “You can use cloud-based software from any device with an internet connection. Online accounting means small business owners stay connected to their data and their accountants. The software can integrate with a whole ecosystem of add-ons. It’s scalable, cost effective and easy to use.”
At the end of the day, all of these benefits add up to greater efficiency, fewer mistakes, and more opportunities to save money.
5. Leverage Tax-Deferred Retirement Plans
Small business owners with LLCs often don’t consider the full tax benefits of retirement plans, but they should. When implemented strategically, your retirement plan can save the business money and simultaneously secure your future.
“The best proactive tax savings tool available to business owners today is retirement plans,” CPA Samuel V. Hicks believes. “No other expense allows owners to claim a deduction without having to give up the money spent for the tax benefit. The money usually has to be kept in a retirement account until certain age thresholds are met, but the growth on the funds is tax-deferred until a distribution is taken.”
6. Fully Utilize Section 179
Section 179 of the IRS code is a blessing to business owners everywhere. It allows a business to deduct the entire purchase price of equipment (including software) in the year of acquisition (up to $1 million). This is far different than the typical seven years that it takes to depreciate the cost of personal property. As you plan equipment purchases, keep Section 179 in mind and be strategic with how you choose to depreciate in relation to your revenue and profits during the course of a given year.
7. Stay Up to Date With New Tax Law Changes
Major tax changes have occurred over the last couple of years and you need to be aware of how some of these modifications could impact your business.
Most of the changes, like the Tax Cut and Jobs Act, are very favorable for small businesses. However, there are also some alterations that could negatively impact your accounting efforts. Reading up on new laws and study a diverse array of opinions to ensure you’re doing everything you can to keep your business moving in the right direction.
8. Deduct Bad Business Debt
Under Section 166(a) of the IRS code, businesses are able to deduct any receivables and bad debt that becomes totally or partially worthless during the tax year. In order to claim the deduction, you have to establish that the debt is genuine and that the amount can’t be recovered. You also have to make reasonable attempts to collect.
9. Hire Contractors Instead of Full-Time Employees
While there are certainly some advantages to having full-time employees on your payroll, there’s also something to be said for working with independent contractors. The latter setup is particularly beneficial when it comes to taxes.
With independent contractors, you don’t have to pay for work you don’t need. Furthermore, you’re not obligated to pay typical employment costs like Social Security and Medicare taxes, insurance, benefits, and retirement contributions. This can save you thousands of dollars per month.
10. Take Advantage of IRC Section 1202 (If Selling in the Next 5-10 Years)
This tip only applies to small business owners who are planning to sell their companies within the next five to 10 years. However, if you fit this description, do some research and consider the advantages of converting to a C corporation to leverage the Section 1202 gain exclusion. This exclusion allows you to sell your stock without paying taxes on the gains, so long as the stock is held for at least five years and the business is structured as a C corporation.
11. Deduct Auto Expenses
Most small business owners use their personal vehicle for business purposes. While you may not think you use it enough to deduct auto expenses, you’d be surprised how much the miles can add up. Currently, you’re able to deduct 54.5 cents per mile driven. This means a few miles per day can add up to thousands in deductions over the course of a year.
12. Take Advantage of Bonus Depreciation
If you purchase a piece of business property and put it into service between the dates of September 27, 2017, and January 1, 2023, you can obtain bonus depreciation of 100 percent. Also, vehicles that are put into service after December 31, 2017, can claim the maximum depreciation of $10,000 in the first year (and up to $18,000 under 100 percent bonus depreciation).
13. File On Time
This is a really simple tip, but it’s one that many small business owners don’t respect. By filing your taxes on time and meeting all required deadlines, you avoid fees and penalties (which can cost your business thousands of dollars before it’s all said and done). Stay on top of taxes and don’t procrastinate.
14. Avoid Audit Traps
Nothing is worse than getting audited. It takes up time, increases your stress load, and costs money (in terms of added expenses and lost productivity). While you can’t always avoid an audit, you can make sure you’re taking smart steps to avoid audit traps and triggers like these.
15. Hire a Professional
The best thing you can do is hire an accountant to help you manage your books and create tax planning strategies that help your business save time and money. You can either hire someone full-time or outsource your accounting to someone else. The outsourcing method is particularly helpful and allows you to keep your finances in order without breaking the bank.
Outsource Your Tax Prep With Taxfyle
At Taxfyle, we understand how much pressure small business owners face on a daily basis. We also believe that tax preparation should be one less burden on your shoulders. In order to facilitate a smoother tax process, we connect you with qualified tax experts who can help you do your taxes, so you won’t have to. It’s fast, efficient, and accurate. Give it a try today!