By: Michelle Gershfeld, Esq., AFC®
After years of being a solid “employee”, David was not personally fulfilled. He felt he was not maximizing his potential, and instead was selling his soul to the devil every day he didn’t take charge of his own destiny. Sound familiar?
David loved consulting and decided a few months back to jump into entrepreneurship. He purchased and read a number of self-help and motivational books. He took classes to gain certifications. He designed and printed business cards and set up a web site. David talked incessantly to friends, relatives, business colleagues and LinkedIn connections about his plans. All excellent uses of David’s time.
But, no one spoke to David about how to set up his new business to maximize the tax benefits he would be entitled to as a business owner. David didn’t know or appreciate the importance of saving all of his receipts and recording his mileage. I only found this out when I was having a business lunch with David. After he insisted on picking up the check, I watched in shock as he rolled the receipt up in a tiny ball. “What are you doing,” I asked. “Don’t you know this counts as a business lunch?”
He looked confused and said that his (day job) company was not going to pay for our lunch, and he personally wanted to treat me for extending my services to him. David did not understand that his paying for lunch, while we discussed his new business, was a business expense reportable to the IRS as a partial deduction to his personal tax return. As were the expenses he incurred in buying educational materials and creating his business cards.
David thought he had to self-absorb all of the start-up costs and that doing so represented unrecoverable “costs of doing business”. Wrong.
Are you starting a new business? Do this:
1. Set up a new, separate money market/checking bank account and credit card. Preferably a different bank other than your personal primary bank, just to ensure everything is entirely separate. It may not be necessary to spend money and legal fees incorporating at the start, but you do need to have a complete divide between your personal assets and expenses, and those of your business.
If you are using your personal money to fund your new business, take money from your personal account and deposit it into your new business account. Again, that account can be in your name, with your social security number (or for free you can get a tax identification number). Keep records and write yourself personal notes acknowledging the money loaned - date and amount - of all capital contributions (money that you lend to your business).
Use the business account for business expenses only. Do not commingle your personal and business expenses.
When you begin to earn revenue, the incoming funds must go directly into the business account and be recorded there as well.
2. Business expenses. There are many benefits to owning and operating your own business, including your “side” business, but you have to play by the rules to enjoy those benefits. When it comes to your expenses, you MUST keep your receipts (you can photograph or scan them into storage). There are great apps you can use to record your expenses (Expensify) and sync them directly to your bank accounts. Or you can do it the old fashioned way by keeping copies in a looseleaf book. Kept receipts by category. Doing so will make your life a lot easier at tax time and produce real savings.
In addition, if you use your vehicle for business purposes, record your mileage. If you are driving to and from business meetings, that mileage can be a tax deduction, which is often overlooked. At 54 cents per mile (53.5 in 2017), that is a big ticket item to ignore. Again there are apps (Mile IQ) you can download or you can keep track the old fashioned way. To benefit, you must keep an accurate log of your travel dates and distances per trip.
With receipts, you can also deduct office supplies and “depreciate” office equipment over its anticipated life.
Tax deductions reduce your gross income, which will be the basis for determining your taxes. The more you can properly deduct, the more you save!
3. Limit expenses. When you are starting a new business, you have to prevent hemorrhaging. This is your business, so every penny spent is one less penny in your pocket. While sometimes it is necessary to spend, when possible, be aware and be frugal. A meeting for coffee is cheaper than a lunch meeting, and meeting in an open space is free. Be careful of the money you spend, and always check your receipts and statements for accuracy.
Additional benefits, such as healthcare deductions and retirement benefit options are available to business owners and should be investigated as well.
Congratulations on taking the leap to financial independence!
"Diligence is the mother of good luck."--Benjamin Franklin
Michelle Gershfeld is a bankruptcy attorney, debt negotiator and accredited financial counselor, who advises people who are in debt, or building wealth, by identifying and overcoming obstacles that lie in their path to securing worry-free, financial wellness. Michelle works with small businesses and their employees to provide financial education and counseling, resulting in increased productivity, employee satisfaction and ROI. Bridging the fields of law and financial counseling, Gershfeld seeks to empower clients in the area of personal finance and provide reliable, non-judgmental, practical solutions. www.GetFinanciallyFit.com