Small businesses are an incredible way to build wealth and a wonderful tool for young adults to learn how to launch and manage businesses on a small scale. Starting a new business venture however can be daunting, especially as new rules and regulations are released or changed. Below are some key points to keep in mind on how on to start a small business venture on the right financial foot.
Consider setting up a simple cash flow system
- Contrary to many beliefs, you don’t need to go out and buy QuickBooks in order to run your business. You can start with something as simple as an excel file to track income and expenses. However, we would highly encourage you to set up a separate checking account (not co-mingled with a personal account) to receive income and pay expenses. This will make tax time a breeze by providing your accountant with a summary of all cash flow from one source.
Keep in mind long term storage for important documents
- It’s important that you begin to store, either digitally or physically, copies of important business documents. Please see the list below on how long to maintain certain records.
- Business origination documents, such as incorporation agreements, operating agreements, and/or share certificates: Keep indefinitely
- Proprietary agreements, such as naming rights, permits, licenses, or other legal documents: Keep indefinitely
- Financial records, such as accounting records, expense receipts and/or bank statements: Keep for three to six years.
- Employment tax records: Keep for at least four years after the tax is paid or is due.
- Failure to file a tax return or tax audit results: If you fail to file a return, keep your financial records indefinitely.
Consider using cash accounting instead of accrual accounting
- Switch to cash accounting to defer taxes; thanks to a 2017 rule change allowing firms, generating under $25 million in revenue for the prior three-year period, to opt for cash accounting instead of accrual accounting. These companies would not owe income taxes on the income from sales until their customers pay.
Consider taking advantage of start-up cost deductions
- Once you officially launch your business, any start-up costs can be deducted over the first 60 months of operations. Eligible expenses may include researching, advertising, travel expenses, and beginning operating expenses.
Consider taking advantage of the business property deduction
- Investing in new infrastructure, can create valuable tax deductions to offset ordinary income. Businesses may take 100% bonus depreciation on the cost of qualified property both acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. This allows you to get a large deduction in one year rather than depreciating it over many years.
Consider all available business expenses
- There are a number of business expenses you are eligible to deduct against your business income for the year, and thereby reduce your taxes. Please review the following list to see if any of these are expenses you already pay and can claim as a deduction:
- Office expenses: If you work from home, you can deduct the cost of your home office. Consider deducting expenses using a simplified home office deduction instead of deducting actual expenses. The simplified method does not require recapture of depreciation on the sale of the home and the deduction for mortgage interest and real estate tax is not reduced.
- Internet/phone expense: The portion of internet or phone services you use for business purposes is deductible.
- Physical property: If you purchase tangible, personal property that lasts for more than one year—for example: computers, office furniture, business-related books. The full cost of such property can usually be deducted in a single year using 100% bonus depreciation, Section 179 expensing, or the de minimis safe harbor (applicable to property that costs $2,500 or less).
- Other items: You may already be paying for subscriptions, supplies, legal and professional services, insurance, or advertising expenses for business purposes, and these items can all be deducted.
Consider the 199A Business Income Deduction
- One of the most valuable deductions for new business owners, is the ability for pass-through businesses—that is sole proprietorships, Partnerships, S corporations, Limited liability companies (LLC), or Limited liability partnerships (LLP)- to deduct up to 20% of their net income from the business. This amount is in addition to all their other business deductions and owners can take it whether or not they itemize. This deduction began on Jan. 1, 2018, and is set to expire on Dec. 31, 2025.
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Disclaimer: Information provided is for educational purposes only. HBWM does not provide tax, legal, compliance, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, HBWM makes no warranties with regard to such information, or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.